FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: November 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________________ to _________________
Commission file number: 0-27068
BAB Holdings, Inc.
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(Name of small business issuer in its charter)
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Illinois 36-3857339
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(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
8501 West Higgins Road, Suite 320, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (773) 380-6100
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $6,323,598
State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $18,656,073, based on 4,326,046 shares held by nonaffiliates as of
February 24, 1997, and the average of the closing bid $4.25 and asked $4.375
prices for said shares in the NASDAQ Small-Cap Market as of such date.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,143,069 shares of Common Stock, as
of February 24, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy materials to be filed on or before March 15, 1997
are incorporated by reference in Part III of Form 10-KSB. In addition, certain
exhibits identified in Part III, Item 12 are incorporated by reference to said
exhibits as filed with Form SB-2 Registration Statement (Commission File No.
33-98060 C), Reports on Form 8-K filed in fiscal 1996, and Annual Report on Form
10-KSB for the fiscal year ended November 30, 1995.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [X] No
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TABLE OF CONTENTS
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PART I..........................................................................................
Item 1. Description of Business.............................................................
(a) Business Development..................................................................
(b) Business of Issuer....................................................................
Overview..............................................................................
Strategy..............................................................................
New Store Development.................................................................
Recent Acquisitions...................................................................
Locations.............................................................................
Store Operations......................................................................
Franchising...........................................................................
Licensing and Licensed Product........................................................
Competition...........................................................................
Trademarks and Service Marks..........................................................
Government Regulation.................................................................
Employees.............................................................................
Item 2. Description of Property.............................................................
Item 3. Legal Proceedings...................................................................
Item 4. Submission of Matters to a Vote of Security Holders.................................
PART II.........................................................................................
Item 5. Market for the Common Equity and Related Stockholder Matters........................
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................
Item 7. Financial Statements................................................................
Item 8. Changes in and Disagreement with Accountants on Accounting and Financial
Disclosure......................................................................
PART III........................................................................................
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act...............................................
Item 10. Executive Compensation.............................................................
Item 11. Security Ownership of Certain Beneficial Owners and Management.....................
Item 12. Certain Relationships and Related Transactions.....................................
Item 13. Exhibits and Reports on Form 8-K...................................................
Reports on Form 8-K..........................................................................
Exhibits.....................................................................................
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT.
The Company was incorporated under the laws of the State of Illinois on
November 25, 1992. The Company operates and franchises specialty bagel stores
under the Big Apple Bagels brand name featuring daily baked "from scratch"
bagels, cream cheeses, coffee and other related products. Additionally, the
Company acts as a licensor of "Big Apple Bagels" bagel-deli units owned and
operated by Host Marriott Services (Host Marriott) featuring the Company's
par-baked bagel and other related products in airport and travel plaza
locations, and operates and franchises Brewster's Coffee concept specialty
retail coffee stores. As of November 30, 1996, there were 13 Company-owned and
131 franchise and licensed Big Apple Bagels stores, and two Company-owned and
three franchise Brewster's Coffee stores located in 25 states and Canada.
Company operations are characterized by the rapid sale and development of
franchised bagel stores. The Company opened 51 new franchised stores during the
fiscal year ended November 30, 1996 and 38 new franchised stores during the
fiscal year ended November 30, 1995.
(b) BUSINESS OF ISSUER.
OVERVIEW
The Company intends to continue expansion of the number of franchised and
Company-owned stores and development of alternative distribution channels for
branded product through the implementation of its strategic plan which includes:
(1) commitment to the growth and financial success of its franchisees; (2)
continued focus on maintaining its position as a low cost producer; (3)
increasing store operating margins by emphasizing its profitable bulk bagel
business; (4) further developing consumer awareness of its multiple brands,
including Big Apple Bagels and Brewster's Coffee; (5) enhancing revenue through
the sale of licensed product; and (6) growth through acquisition and development
of Company-owned stores.
STRATEGY
The Company believes that implementation of its strategic plan will result
in continued growth in franchised, licensed and Company-owned units during 1997.
COMMITMENT TO FRANCHISING--The Company is committed to the growth and
financial success of its franchisees and expects that continued development of
franchised stores will comprise the most significant component of near term
growth. The bagel restaurant concept is conducive to franchising given its
relatively simple operation, low initial investment and strong cash returns. The
Company's diverse group of franchisees can effectively expand in a variety of
markets without placing undue strain on the Company's financial or personnel
resources. The Company plans to exceed its fiscal 1996 franchise unit growth
during fiscal 1997.
LOW COST PRODUCER--The Company believes that the "fresh from scratch"
baking processes used in Big Apple Bagels franchise and Company-owned stores
allow operators to produce bagel products at a cost lower than that of its major
competitors, many of which ship product to stores from a central location. All
cream cheeses are also mixed in-store, rather than delivered pre-packaged, which
creates additional in-store margin. Further, the Company believes that it
develops and builds its stores at an initial cost which is substantially lower
than the construction costs incurred by many other competitors.
FOCUS ON BULK SALES--A majority of all bagel sales by Big Apple Bagels
franchise and Company-owned stores are carry-out orders of six or more bagels.
These bulk purchases are one of the Company's highest margin products. The
Company's site selection criteria, elements of store design and promotional
pricing policies all contribute to a focus on bulk sales of packaged bagels.
Stores are sited for convenience and visibility, with ample parking. Store
interiors are designed to feature the abundance of bagel offerings. In-store
pricing includes daily "specials" intended to promote larger purchases.
MULTIPLE BRANDS--The Company expects to continue to expand the brand
awareness of Big Apple Bagels, as well as further promote Brewster's Coffee. The
Big Apple Bagels brand already enjoys high consumer awareness and loyalty.
During 1997 the Company expects to further strengthen the awareness of
Brewster's Coffee through aggressive franchising of the concept and continued
distribution of Brewster's Coffee products through alternate channels.
SALE OF LICENSED PRODUCT--The Company will continue to license branded food
products to franchisees and other food service companies. Since May 1996, the
Company has offered Brewster's Coffee to its Big Apple Bagels franchisees. In
November 1996, the Company entered into a licensing agreement with Oberweiss
Dairy, Inc., a home-delivery dairy with over 20,000 home-delivery customers in
northern Illinois, for the distribution of ground and whole-bean Brewster's
Coffee. The Company will also expand the number of non-traditional locations
offering Big Apple Bagels on a licensed basis, adding new units related to
existing relationships with Host Marriott and Mrs. Fields Cookies and developing
new relationships with other companies for licensed sales.
GROWTH THROUGH ACQUISITION AND DEVELOPMENT OF COMPANY-OWNED STORES--The
Company has a history of growth through acquisitions. During fiscal 1996, the
Company completed four acquisitions. The Company intends to continue to
selectively pursue acquisitions in the future in order to complement new store
development. The Company also intends to build new stores to increase its
Company-owned store base.
NEW STORE DEVELOPMENT
The Company intends to build additional Company-owned stores in several
geographic regions and to expand its current franchise and licensed operations.
Management believes that Big Apple Bagels stores have excellent unit economics
and that excellent growth opportunities exist. At November 30, 1996, the Company
had numerous individual franchise and area development agreements with qualified
franchisees and area developers to ensure the continued growth in franchise
units. At November 30, 1996, the Company had collected initial franchise and
area development fees for the development of 62 future Big Apple Bagels
franchise stores and had sold a master franchise agreement for the potential
development of 42 additional franchise stores in western Canada. Initial
franchise fees for a Big Apple Bagels franchise unit are $21,500. Big Apple
Bagels franchise stores each require an approximate investment by franchisees of
between $176,350 and $317,350.
In selecting new store locations, the Company considers target population
density, household income levels and trade area demographics, as well as
specific location characteristics, such as visibility, accessibility, parking
capacity, and traffic volume. An important factor in site selection is the
convenience of the potential location to both morning commuter traffic and lunch
guests and the occupancy cost of the proposed site. The Company also takes into
account potential local competition and the success of chain restaurants
operating in the area. To date, most of the Big Apple Bagels Company-owned and
franchise stores have been, and are, located in strip shopping malls and
neighborhood shopping centers, and management currently expects that most of the
stores opened in the future will be in similar type facilities.
RECENT ACQUISITIONS
In February 1996, the Company acquired the trademark and franchise rights,
wholesale accounts and certain other assets, including two franchise units, of
Brewster's Coffee Company, Inc. ("Brewster's") for a total purchase price of
approximately $227,000. Brewster's Coffee is now sold through all Company-owned
and approximately 90% of franchise Big Apple Bagels stores. In November 1996,
the Company, through a foreclosure proceeding on the former owner of Brewster's,
obtained additional assets including certain Brewster's Coffee units, both in
operation and closed, furniture and fixtures and contract rights pertaining to
additional consideration to be paid the former owners of Brewster's by the
Company based on future coffee sales. During November 1996 the Company sold
three of these acquired units to Brewster's franchisees.
In May 1996, the Company acquired certain assets of Bagels Unlimited, Inc.
("BUI"), a Milwaukee-based Big Apple Bagels franchisee, including five stores
and certain contract rights, for a total purchase price paid to the sellers of
approximately $1,224,000. The Company also entered into non-competition
agreements with the two principals of BUI in consideration of $100,000. Such
agreements prohibit these principals from being involved in the retail or
wholesale sale of bagels within a four-mile radius of any existing Big Apple
Bagels store for six years after the close of the transaction. The stores
acquired in the BUI acquisition are now owned and operated by the Company.
In May 1996, the Company acquired certain assets of Strathmore Bagel
Franchise Corp. ("Strathmore") for a total purchase price of approximately
$1,710,000 which included cash paid to the former owners of $850,000 and options
to purchase 625,000 shares of the Company's common stock valued at approximately
$860,000, plus additional compensation based on future openings of licensed
units in the Host Marriott system. Strathmore distributed bagels and related
products at wholesale and collected royalties on retail sales pursuant to a
license agreement with Host Marriott. As of the date of closing, Strathmore had
contracts with 19 bagel-deli units and 15 bagel cart/display units operated by
Host Marriott in airports and travel plazas. The Company acquired the rights to
the license agreement with Host Marriott, contracts for each facility, supply
contracts, equipment leases, and vendor arrangements, as well as machinery,
equipment, and improvements owned by Strathmore and located in the Host Marriott
facilities. The Company also entered into noncompetition agreements with the two
principals of Strathmore prohibiting such individuals from engaging in any
business that receives 30% of its revenues from the production or sale of bagels
or the franchising of such business in any place in the world where Host
Marriott has a presence in an airport or travel plaza for a period of two years
following closing.
In October 1996 the Company acquired certain assets of Danville Bagels,
Inc. ("Danville"), a franchisee of the Company operating two Big Apple Bagels
stores in Northern California, for a purchase price of approximately $603,000.
Additionally, as part of the acquisition, the Company entered into
noncompetition agreements with the two former principals of Danville. The
acquired stores are currently operated as Company-owned Big Apple Bagels units.
LOCATIONS
The following table sets forth the states and province in which Big Apple
Bagels stores were located as of November 30, 1996.
STATE/PROVINCE COMPANY FRANCHISED LICENSED(1) TOTAL
- ------------------------- ------- ---------- ----------- -----
UNITED STATES:
Arizona................ 1 1
California(2).......... 4 5 9
Colorado............... 6 6
Connecticut............ 2 2
Florida................ 1 1 2
Georgia................ 1 1
Illinois(3)............ 4 38 42
Indiana................ 2 2
Iowa................... 5 5
Kansas................. 1 1
Michigan............... 10 5 15
Minnesota.............. 1 1 2
Missouri............... 1 1
Nebraska............... 1 1
Nevada................. 1 1
New Jersey............. 12 12
New York............... 8 8
North Carolina......... 6 6
Ohio(3)................ 6 6
Pennsylvania........... 2 2
South Carolina......... 1 1
Texas.................. 1 1
Utah................... 1 1
Washington............. 2 2
Wisconsin.............. 6 11 17
CANADA:
Ontario................ 2 2
------- ---------- ----------- -----
TOTAL.................... 15 99 35 149
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(1) Host Marriott units.
(2) Included four stores operated as "Just Bagels" stores at November 30, 1996,
three of which were converted to Big Apple Bagels stores during the first
quarter of fiscal year 1997, and one of which is being converted to a
Brewster's Coffee unit.
(3) Includes two Company-owned Brewster's Coffee units (both in Illinois) and
three franchised Brewster's Coffee units (two in Illinois and one in Ohio).
STORE OPERATIONS
PRODUCTS--Big Apple Bagels franchisees and Company-owned stores daily bake
"from scratch" over 18 varieties of fresh bagels and prepare up to 18 varieties
of cream cheese spreads. While bulk bagel and cream cheese sales account for a
significant portion of retail sales, most stores also offer a variety of
breakfast and lunch bagel sandwiches, soups, various dessert items, and gourmet
coffees and other beverages.
The key component of the Big Apple Bagels product strategy is the
proprietary "fresh from scratch" production process, which utilizes high quality
ingredients and a steam-baking process. As compared to the traditional boiling
process, the steam-baking process produces a larger bagel with a moister
interior and a firm crust. In addition, the Company believes that the "from
scratch" steam-baking process, when compared to other production methods, is
more cost efficient and produces a bagel with extended freshness.
STORE LOCATIONS AND LAYOUT--A typical Big Apple Bagels franchise or
Company-owned store is located within a three-mile radius of at least 25,000
residents in an area with a mix of both residential and commercial properties.
The average Company-owned and franchised store ranges from 1,500 and 2,000
square feet. The Company's current store prototype approximates 2,000 square
feet, with seating capacity of 30 to 40 persons and 750 square feet devoted to
production and baking. A satellite store is typically smaller than a production
store, averaging 600 to 1,000 square feet. Although franchise stores may vary in
size from Company-owned stores, and from other franchise stores, store layout is
generally consistent. Typically, both franchised and Company-owned stores are
open daily from 6:00 a.m. to 6:00 p.m.; however, stores may extend their evening
hours to accommodate customer demand.
FRANCHISING
The Company requires payment of an initial franchise fee per Big Apple
Bagels store, plus a 5% royalty on net sales, and a 2% national advertising fund
contribution. The Company offers multiple store discounts on the initial
franchise fee. The Company currently requires a franchise fee of $21,500 on the
first store (increased from $20,000, effective February, 1997). The fee for
second, third, fourth, and fifth stores is $18,500 and the fee for the sixth
store and any additional store is $12,500. The initial franchise fee for a
Brewster's store is $17,500, with a fee of $15,000 for the second and third
stores and $13,500 for the fourth store and any additional stores. Ongoing
Brewster's fees include a 5% royalty on sales.
Franchise agreements provide a franchisee with the right to develop one
store at a specific location. Each franchise agreement is for a term of ten
years with the right to renew at no additional fee. A franchisee is required to
be in operation not later than ten months following signing the franchise
agreement. A franchise is considered "sold" when a franchise agreement has been
executed by both the franchisee and the Company and when the initial franchise
fee has been received or placed into an escrow account pursuant to the franchise
regulations of individual states.
Area development agreements, which may be granted to an existing franchisee
or concurrent with the execution of a franchise agreement, provide that a
franchisee may open a predetermined number of Big Apple Bagels stores within a
defined geographic area (an "Area of Exclusivity"). The Area of Exclusivity is
negotiated prior to the signing of the area development agreement and varies by
agreement as to size of the area, the number of Big Apple Bagels stores
required, and the schedule for store development and opening. A typical area
development agreement requires that a signed lease be obtained for the
franchisee's second store within 210 days of execution of the initial franchise
agreement. Executed leases for subsequent stores are generally required in
six-month intervals thereafter. Both franchise and area development agreements
contain cross-default provisions. Failure to develop the stores on schedule may
result in a loss of exclusivity within the Area of Exclusivity. The Company's
current area development fee is $5,000 per store to be developed. As additional
franchise agreements are executed additional franchise fees are collected. The
area development fee is not refundable if no franchise agreement is executed.
The process of opening a franchise store includes selection of a site,
negotiation of a lease, design of the store, application for all necessary
permits, construction of the store, and training of the franchisee. The Company
estimates that a franchisee's cost to open a Big Apple Bagels store, including
the initial franchise fee, cost of construction, leasing of space and other
start-up costs, is generally between $176,350 and $317,350.
The Company assists in site selection by obtaining market demographics,
visiting potential sites, and giving final approval. During the design phase,
all blueprints are reviewed and approved by the Company and discussed with the
franchisee. All equipment necessary to operate a Big Apple Bagels store must be
purchased from pre-approved vendors, and one cash register is supplied by the
Company to each franchisee. The Company provides support to its franchisees
throughout the store development process, including a mandatory ten-day training
program (five days of classroom instruction on administration, record keeping,
and inventory control, and five days of in-store instruction on baking and food
preparation). For a few days before and after store opening, the Company
provides assistance at the franchisee's store to ensure that the store is
operating properly and in accordance with Company standards.
The Company monitors each franchisee's operations and product quality
through review of weekly reports and quarterly financial statements, quarterly
field visits, weekly management meetings and nightly cash register polling via a
computer modem connection with each store's cash register. Cash register polling
allows the Company to monitor each store's daily performance, including review
of such data as net retail sales, customer count, coupons, promotional activity,
and average sales. These overview mechanisms allow the Company to quickly
identify potential problems and lend operational, marketing, or accounting
assistance.
The Company regularly communicates with its franchisees and encourages
active communication among its franchisees through franchisee newsletters,
special bulletins, and periodic meetings. In addition, Company personnel provide
telephone support with respect to operational issues, as well as ongoing
assistance with advertising and promotion. Retail sales are promoted by
advertising in newspapers, through direct mail, and on radio in several markets.
Franchisees are required to contribute to the Company's national marketing fund
based on net sales and are reimbursed for a portion of the media advertising
they place in their local market, up to the amount contributed. During 1995, the
Company was instrumental in organizing an advertising cooperative association
among its franchisees in the Chicago, Illinois area. The cooperative enables
individual franchisees to gain access to and effectively advertise by means that
would otherwise be cost-prohibitive for individual franchisees. The Company
anticipates that other groups of franchisees will replicate this concept within
their respective market areas.
The Company currently advertises its franchising opportunities at franchise
trade shows and in newspapers and business opportunity magazines. In addition, a
substantial number of prospective franchisees contact the Company as a result of
patronizing an existing store.
To facilitate growth in franchising operations, the Company may assist
qualified franchisees with equipment lease and/or construction financing. The
Company negotiates for discounts on the purchase of major equipment in exchange
for commitments to purchase large volumes directly from the manufacturer.
On February 10, 1997, BAB Systems, Inc. ("Systems"), a wholly-owned
subsidiary of the Company, entered into an agreement with Franchise Mortgage
Acceptance Company, LLC ("FMAC") of Greenwich, Connecticut to provide financing
to qualifying existing Big Apple Bagels franchisees for the purpose of adding
second or subsequent units. The program is completely administered by FMAC and
gives Systems the final right of financing approval on individual applications.
Under the agreement, Systems has provided a guarantee of borrowings up to a
maximum of 10% of the total amount of financing provided to qualified
franchisees in a twelve-month period under the program. FMAC has reserved a
total of $25 million for the program. As the program is new, it has not been
offered to franchisees and, accordingly, there are currently no loans
outstanding.
LICENSING AND LICENSED PRODUCT
The Company currently sells two licensed food products: Big Apple Bagels
and Brewster's Coffee. Big Apple Bagels are sold on a licensed basis through 35
licensed Big Apple Bagels units owned and operated by Host Marriott, including
airports and travel plazas, and through Mrs. Fields Cookies stores. Brewster's
Coffee is sold through all Company-owned and approximately 90% of franchise Big
Apple Bagel stores, as well as through Oberweise Dairy, a direct home-delivery
dairy.
Following the Strathmore acquisition, the Company developed a par-baked
frozen bagel for distribution to the Host Marriott system by a third-party
commercial bakery. Given the tendency of units located in airports and travel
plazas to sales of single bagels and deli sandwiches, rather than the bulk bagel
sales which generally predominate at traditional retail sites, the Company
believes that the deviation from its normal "fresh from scratch" approach is
appropriate. Where the product is immediately consumed by the customer, extended
freshness is not a significant factor. Due to the limited space considerations
in such locations, the use of convection ovens rather than the full steam oven
used in the Company's traditional retail sites offers further efficiencies. The
Company collects a licensing fee of 3% of bagel-related sales in the 34 units
that existed at the Strathmore acquisition date and collects a 3% licensing fee
on all nonbeverage sales from additional units developed by Host Marriott, as
well as a commission on the sale of par-baked bagels by the third party
commercial bakery to the Host Marriott units.
Since August 1996, par-baked frozen bagels have also been sold to some of
the nearly 1,000 stores in the Mrs. Fields Cookies network. In the limited time
period since introducing this program, the Company believes that approximately
250 stores in the Mrs. Fields system have begun to stock Big Apple Bagels
product. As part of the arrangement, Mrs. Fields Cookies are also offered to Big
Apple Bagels franchisees who may choose to stock the item.
Brewster's Coffee is a premium grade arabica coffee which is roasted and
shipped by a third party coffee roaster. The coffee is purchased and roasted to
the Company's specifications. The Company collects a commission on the sale of
Brewster's Coffee to its franchisees by the third party commercial coffee
roaster.
In November 1996, the Company entered into a licensing agreement with
Oberweiss Dairy, Inc., a home-delivery dairy with over 20,000 home-delivery
customers in northern Illinois, for the distribution of ground and whole-bean
Brewster's Coffee.
The Company is actively exploring additional potential distribution
channels for both Big Apple Bagels and Brewster's Coffee. Potential new
customers include convenience stores, economy motels, institutional food
services and other restaurants.
COMPETITION
The quick service restaurant industry is intensely competitive with respect
to product quality, concept, location, service and price. There are a number of
national, regional and local chains operating both owned and franchised stores
which may compete with the Company on a national level or solely in a specific
market or region. The Company believes that because the bagel industry is
extremely fragmented, there is a significant opportunity for bagel chains,
including both the Company and its competitors, to expand dramatically.
The Company believes that its four most direct competitors are Bruegger's
Bagel Bakery ("Brueggers"), Einstein Noah Bagel Corp. ("Einstein"), Manhattan
Bagel Company, Inc. ("Manhattan"), and Chesapeake Bagel Bakery ("Chesapeake"),
all of which are also franchisors. As of the most recently available public
information, Bruegger's, Einstein, Manhattan and Chesapeake had 435, 298, 287
and 145 stores open, respectively. There are several other regional bagel chains
with under fifty stores, all of which may be expected to compete with the
Company, including Bon Jour Bagel Cafe and All American Food Group, Inc.
The Company competes, and can be anticipated to compete, against numerous
small independently-owned bagel bakeries and fast food restaurants, such as
Dunkin' Donuts, that offer bagels as part of their breakfast food offerings and
supermarket bakery sections. In particular, the Company's bagels compete against
Lenders Bagels and other brands of fresh and frozen bagels offered in
supermarkets. Certain of these competitors may have greater product and name
recognition and larger financial, marketing and distribution capabilities than
the Company. In addition, the Company believes that the startup costs associated
with opening a retail food establishment offering similar products on a
stand-alone basis are competitive with the startup costs associated with opening
a Big Apple Bagels store and, accordingly, such startup costs are not an
impediment to entry into the retail bagel business.
The Company believes that Big Apple Bagels stores compete favorably in
terms of taste, food quality, convenience, customer service, and value, which
the Company believes are important factors to its targeted customers.
Competition in the food service industry is often affected by changes in
consumer taste, national, regional, and local economic and real estate
conditions, demographic trends, traffic patterns, the cost and availability of
labor, consumer purchasing power, availability of product, and local competitive
factors. The Company attempts to manage or adapt to these factors, but not all
such factors are within the Company's control and such factors could cause the
Company and some or all of its area developers and franchisees to be adversely
affected.
The Company competes for qualified franchisees with a wide variety of
investment opportunities in the restaurant business and in other industries. The
Company's continued success is dependent to a substantial extent on its
reputation for providing high quality and value with respect to its service,
products and franchises, and this reputation may be affected not only by the
performance of Company-owned stores but also by the performance of its franchise
stores over which the Company has limited control.
TRADEMARKS AND SERVICE MARKS
The trademarks and service marks "Big Apple Bagels," and "Brewster's
Coffee" are registered under applicable federal trademark law. These marks are
licensed by the Company to its franchisees pursuant to franchise agreements, and
the Company has licensed the "Big Apple Bagels" mark to Big Apple Bagels, Inc.,
a corporation which is wholly-owned by Paul C. Stolzer, a director and principal
shareholder and the former President of the Company. Mr.
Stolzer currently serves as a consultant to the Company.
The Company is aware of the use by other persons and entities in certain
geographic areas of names and marks which are the same as or similar to the
Company's marks. Some of these persons or entities may have prior rights to
those names or marks in their respective localities. Therefore, there is no
assurance that the marks are available in all locations. It is the Company's
policy to pursue registration of its marks whenever possible and to vigorously
oppose any infringement of its marks.
GOVERNMENT REGULATION
The Company and its franchisees are required to comply with federal, state
and local government regulations applicable to consumer food service businesses,
including those relating to the preparation and sale of food, minimum wage
requirements, overtime, working and safety conditions, and citizenship
requirements, as well as regulations relating to zoning, construction, health,
and business licensing. Each store is subject to regulation by federal agencies
and to licensing and regulation by state and local health, sanitation, safety,
fire and other departments. Difficulties or failures in obtaining the required
licenses or approvals could delay or prevent the opening of a new Company-owned
or franchise store, and failure to remain in compliance with applicable
regulations could cause the temporary or permanent closing of an existing store.
The Company believes that it is in material compliance with these provisions.
Continued compliance with these federal, state and local laws and regulations is
costly but essential, and failure to comply may have an adverse effect on the
Company and its franchisees.
The Company's franchising operations are subject to regulation by the
Federal Trade Commission (the "FTC") under the Uniform Franchise Act which
requires, among other things, that the Company prepare and periodically update a
comprehensive disclosure document known as a Uniform Franchise Offering Circular
("UFOC"), in connection with the sale and operation of its franchises. In
addition, some states require a franchisor to register its franchise with the
state before it may offer a franchise to a prospective franchisee. The Company
believes its UFOC, together with any applicable state versions or supplements,
complies with both the FTC guidelines and all applicable state laws regulating
franchising in those states in which it has offered franchises.
The Company is also subject to a number of state laws, as well as foreign
laws (to the extent it offers franchises outside of the United States), that
regulate substantive aspects of the franchisor-franchisee relationship,
including, but not limited to, those concerning termination and non-renewal of a
franchise.
EMPLOYEES
As of November 30, 1996, the Company employed 399 persons. Of these
individuals, 366 work in the Company-owned stores and the majority are part-time
employees. The remaining employees are responsible for oversight of franchising
and Company-store operations. The Company anticipates hiring additional
employees to develop and support new Company-owned stores, to assist in sales
and marketing, and to support the growing number of franchise stores.
None of the Company's employees is subject to any collective bargaining
agreements and management considers its relations with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive office, consisting of approximately 4,600
square feet, is located in Chicago, Illinois and is leased pursuant to two
five-year leases, expiring in March 2000. The Company additionally rented
approximately 3,300 square feet in the same building on October 1, 1996,
expiring in June 1999. Additionally, the Company leases space for each of its
Company-owned stores. Lease terms for these stores are generally for initial
terms of five years and contain options for renewal for one or more five year
terms. See note 6 to the Company's consolidated financial statements contained
herein for further information.
ITEM 3. LEGAL PROCEEDINGS
On April 16, 1996, the Company filed an arbitration action against a
franchisee alleging breach of its franchise agreement for refusal to submit
required sales reports and pay royalty fees and contributions to the national
marketing fund. The franchisee filed suit in the Circuit Court of Cook County,
Illinois against the Company and its officers and directors on April 19, 1996.
The franchisee alleges that the Company misrepresented the initial investment
required to establish a store and made untrue and unauthorized earnings claims
in violation of the Illinois Franchise Disclosure Act. Plaintiffs seek
rescission of the franchise agreement, damages of $600,000 and punitive damages
in the amount of $6,000,000. Management believes the case is without merit and
on May 28, 1996, filed a motion to stay litigation in order to compel the
plaintiffs to have their claims heard in arbitration as required by the
provisions of the franchise agreement. No definite date has been set for the
arbitration hearing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended November 30, 1996, no
matter was submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the quarterly high and low sale prices for
the Company's Common Stock, as reported in The NASDAQ Stock Market's Small-Cap
Market since beginning of trading on November 27, 1995. The Company's Common
Stock is traded under the symbol "BAGL." Prices reflect a three-for-two stock
dividend paid on April 26, 1996 to holders of record as of April 12, 1996.
LOW HIGH
--- ----
YEAR ENDED NOVEMBER 30, 1995
Fourth quarter (beginning November 27, 1995)...... $3.33 $4.33
YEAR ENDED NOVEMBER 30, 1996
First quarter..................................... $3.17 $4.50
Second quarter.................................... 4.00 9.13
Third quarter..................................... 6.25 11.75
Fourth quarter.................................... 6.75 9.00
As of February 13, 1997, the Company's Common Stock was held of record by
185 holders. Registered ownership includes nominees who may hold securities on
behalf of multiple beneficial owners.
The Company has never declared or paid any cash dividends on its Common
Stock, and the Board of Directors currently intends to retain all earnings, if
any, for use in the Company's business for the foreseeable future. Any future
determination as to declaration and payment of dividends will be made at the
discretion of the Board of Directors, subject to the existence of any covenants
restricting the payment of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The selected financial data contained herein have been derived from the
financial statements of the Company included elsewhere in this Report on Form
10-KSB. The data should be read in conjunction with the consolidated financial
statements and notes thereto.
Certain statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations, including statements regarding
the development of the Company's business, the markets for the Company's
products, anticipated capital expenditures, and the effects of completed and
proposed acquisitions, and other statements contained herein regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). Because such
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly release the results of any revision to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
GENERAL
From its inception in November 1992, the Company has grown to 15
Company-owned and 134 franchised and licensed units. This rapid expansion in
operations significantly affects the comparability of results of operations of
the Company in several ways, particularly in the recognition of initial
franchise fee revenue and ongoing royalty fees, as well as the significant
increase in Company-owned store revenues.
The Company's revenues are derived primarily from the operation of
Company-owned stores, initial franchise fees and ongoing royalties paid to the
Company by its franchisees. Additionally, in 1996 the Company significantly
increased revenue derived from the sale of licensed products as a result of
purchasing trademarks (Brewster's Coffee), licensing contracts (Strathmore
Bagels Franchise Corporation's licenses with Host Marriott) and by directly
entering licensing agreements (Mrs. Fields Cookies). Additionally, the Company
has generated other revenue through the sale of store units to franchisees of
the Company. In adding 13 Company-operated units during the year, the Company
has created a stable revenue base in Company-owned store revenue and has become
less dependent on initial franchise fee revenue.
Management intends to continue to increase revenue through internal growth
and acquisitions during 1997. The building blocks to revenue growth were laid
during 1996 through five significant acquisitions and contractual relationships.
In February 1996, the Company acquired the trademark rights to Brewster's
Coffee, a premium roasted arabica bean coffee, as well as the rights to
franchise Brewster's Coffee concept coffee shops. The Company offers Brewster's
Coffee to its franchisees and licensees and contracts with a third party coffee
roaster to manufacture the product for sale. It collects a commission based on
pounds of coffee sold by the third party roaster. In May 1996, the Company
completed the acquisitions of Bagels Unlimited, Inc. ("BUI") and Strathmore
Bagels Franchise Corporation ("Strathmore"). BUI was a franchisee of the
Company operating five Big Apple Bagels stores in the Milwaukee, Wisconsin
market which were converted to Company-operated units. Strathmore had licensing
contracts with Host Marriott to operate 34 Strathmore Bagels units in airports
and travel plazas. The Company assumed these agreements and converted the
Strathmore units to Big Apple Bagels units, giving the Company a presence in
airport and travel plaza locations served by Host Marriott. The Company derives
both a licensing fee as a percentage of bagel sales in these units, as well as a
sales commission on the sale of par-baked bagels to Host Marriott by a third
party commercial bakery. One additional unit was opened in November 1996 and the
Company expects additional units will open during 1997.
In June 1996, the Company entered a licensing agreement with Mrs. Fields
Development Corporations ("Mrs. Fields") to sell the Company's par-baked bagel
product in some of the nearly 1,000 stores in the Mrs. Fields Cookie system.
Management believes that approximately 250 Mrs. Fields units have begun to stock
Big Apple Bagels. The Company derives a licensing fee on the sale of this
product by the commercial bakery to Mrs. Fields stores. In October 1996, the
Company acquired certain assets of Danville Bagels, Inc., a franchisee of the
Company operating two Big Apple Bagels stores in northern California, for
conversion to Company-operated units. Subsequent to year-end, the Company
completed acquisitions in January 1997 of Just Bagels, Inc. and affiliates,
which operated four stores as franchisees of the Company for conversion to
Company-owned units.
Additionally, in February 1997 the Company signed a letter of intent to
complete a tax free merger with My Favorite Muffin Too, Inc., a privately held
operator and franchisor of 59 specialty muffin and bagel cafes primarily located
in the eastern United States, and to acquire two separate companies operating a
total of five company-owned My Favorite Muffin and Bagel stores in New Jersey
and Pennsylvania (collectively "MFM"). Upon completion, and combined with the
other acquisitions and agreements during the year, the Company believes that it
will significantly increase revenues and earnings potential in 1997 and beyond.
In September 1996, the Company signed an agreement to purchase the
operations of Chesapeake Bagel Bakery ("Chesapeake"), an operator and franchisor
of approximately nine company-owned and 134 franchise Chesapeake Bagel Bakery
specialty bagel retail stores. The acquisition agreement was subject, among
other factors, to the Company's successful financing of the cash portion of $22
million of the purchase price. In November 1996, the Company filed a
registration statement on Form S-1 to register shares of the Company's common
stock to be sold through a registered direct offering to qualified institutional
investors. Being unable to complete the sale of common stock at a share price
which made the transaction economically beneficial to the Company, the Company
withdrew its registration statement in December 1996 and on December 31, 1996,
the expiration date of the agreement with Chesapeake, announced it would not
complete the proposed acquisition. As a result of the failure to complete this
acquisition, the Company recorded a write-off of approximately $651,000 in the
fourth quarter of fiscal 1996, consisting primarily of accounting, legal,
printing, placement agent expenses and filing fees associated with the stock
offering and acquisition. Management believes that while the failed acquisition
of Chesapeake diverted management and operational attention during the second
half of 1996, the Company's existing operations and prospects for further
strategic acquisitions during 1997, including the MFM acquisition noted above,
have the potential to replace the strategic advantage the Company believed would
have followed the completion of the Chesapeake acquisition.
As a result of adding 13 Company-owned stores during the year, management
believes the Company did not realize the potential of its expected margins from
Company-owned store operations during the year. The Company constructed and
opened as new units a total of five of the 15 Company-owned units. Additionally,
one unit in the BUI acquisition had only been open for approximately three weeks
prior to the Company's acquisition of the store. New store operations suffer
from low revenues in the early stages of operations and inefficiencies due to
continuing training activities of store-level personnel. Similarly, as early
stores are opened in a specific geographic market, the efficiencies of
advertising, promotion and area management are not reached and cause an
additional drain on store-level economics. Start-up costs related to
expenditures incurred prior to opening individual units, which are amortized
over the first year of operation of a store, additionally reduce operating
profitability during the early stages of store operations. Stores added this
year which were acquired and converted to Company-owned units, while not
generally affected by low early stage revenues, also exhibit inefficiencies in
early operations due to initial staff and management turnover and related
training issues resulting in higher than normal costs. As the Company intends to
continue to add Company-owned stores in fiscal 1997, Management believes similar
inefficiencies will result from these stores but will decline as a percent of
total Company-owned store operations.
With the increase in both franchise, licensed and Company-owned operations,
the Company has experienced increases in payroll, occupancy and overhead costs
in the corporate offices. At November 30, 1996 the Company had 33 employees at
the corporate level who oversee operations of the franchise, licensed and
Company-owned store operations, up from 21 at the end of 1995. While these costs
have increased, they have decreased as a percent of total revenues, and
management expects that these costs will further decline as a percent of revenue
as additional franchise and Company-owned units are added in 1997. While
management has not completed a comprehensive plan of operations related to the
proposed MFM merger, it is expected that this acquisition and existing Company
growth will require only modest increases in employee headcounts at the
corporate office. Additionally, as the Company approximately doubled the space
at the corporate headquarters in late 1996 through subletting an office suite
adjacent to the Company's existing offices, it is anticipated that the Company
will not require additional office facilities in the foreseeable future. The
Company believes it is in a position to leverage selling, general and
administrative expenses across increasing revenue in the coming year.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years 1996 and 1995, revenue
by type and as a percentage of total revenue during the year, along with the
change from 1995 (in thousands):
Year ended November 30,
--------------------------------
1996 1995 Increase
--------------- --------------- --------
Selected Revenue Data:
Company-owned stores $3,484 55.1% $ 563 27.7% $2,921
Franchise and area development fees 1,024 16.2% 700 34.5% 324
Royalty fees from franchise stores 1,403 22.2% 767 37.7% 636
Licensing fees and other income 413 6.5% 3 0.1% 410
--------------- --------------- ------
Total $6,324 100.0% $2,033 100.0% $4,291
=============== =============== ======
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Total revenues increased 211% to $6,324,000 in 1996 from $2,033,000 the
prior year. This increase was driven primarily by the increase in Company-owned
store revenues which accounts for 55.1% of total revenue in 1996 up from 27.7%
in the prior year. The Company added 13 Company-owned units during the year
bringing the total to 15 in operation at November 30, 1996. Franchise and area
development fees rose to $1,024,000 or 16.2% of total revenue in 1996 from
$700,000 or 34.5% of total revenue in 1995 as a result of opening a total of 51
franchise units during the year compared to 38 during 1995. Additionally,
$161,000 of the 1996 increase in these fees is attributable to the Company
entering into a master franchise agreement with an Alberta, Canada corporation
for the development of franchised stores in the four western provinces of
Canada. Royalty fees from franchise stores increased to $1,403,000 or 22.2% of
revenue in 1996 from $767,000 or 37.7% or revenue in 1995, as a result of the
higher number of franchise stores in operation in 1996 compared to the prior
year. Licensing fees and other income increased from approximately $3,000 in
1995 to $413,000 for 1996 or 6.5% of total revenues, as a result of the
Company's entrance into various nontraditional channels of distribution, such as
the sale of Brewster's Coffee to franchisees and licensees of the Company,
licensing fees paid by Host Marriott on the sales of product in Big Apple Bagels
licensed units in their system, and commissions received on the sale to Host
Marriott and Mrs. Fields by a third party commercial baker of par-baked Big
Apple Bagels. Additionally, the Company generated $123,000 from the resale to
franchisees of stores acquired during the year.
Food, beverage and paper costs, and store payroll and other operating
expenses increased by 538.3% and 519.3%, respectively, in 1996 as a result of
increasing the Company-owned stores base from two units at the close of 1995 to
15 at the end of 1996. Total food, beverage and paper costs consumed 35.1% of
Company-store revenue for 1996 versus 34.0% in 1995, while store payroll and
other operating expenses remained at 50.3% of revenue in both periods. The
levels of these rates, and the increase from 1995 in food, beverage and paper
costs, are a direct result of the increase in Company-owned stores during the
year and related start-up inefficiencies. Costs of the uncompleted business
acquisition were the result of acquisition-related costs and stock offering
costs related to the Company's uncompleted acquisition of Chesapeake (see
"General" above) which accounted for 10.3% of total 1996 revenue.
Selling, general and administrative expenses increased 67.7% to $3,318,000
during 1996 from $1,979,000 in the prior year as a result of supporting an
increasing base of franchise stores as well as the significant increase in
Company-owned stores during the year. Payroll-related costs increased 52.9%
during the year due to the increase in corporate level headcount from 21 at the
beginning of 1996 to 33 at the close of the year. Advertising and promotion
expense increased 209.6% due to increased advertising costs related to the
Company-owned stores base. Professional service fees declined 5.7% in 1996, as
compared to 1995, as the prior year included additional legal and accounting
costs preceding the Company's initial public offering in November 1995.
Franchise-related costs, those costs associated with franchise openings,
increased 55.5% as a result of the increase in franchise openings from 38 in
1995 to 51 in 1996. Depreciation and amortization expense increased 482.6% due
to the significant increase in Company-owned store depreciation and related to
amortization of intangible assets including goodwill, contract rights,
noncompetition agreements and trademarks resulting from the Company's various
acquisitions during 1996. Other selling, general and administrative expenses
increased 66.4% following trends in other components of this category.
Loss from operations was $621,000 in 1996 versus $421,000 in 1995,
representing a 47.6% increase from 1995. Without the impact of the uncompleted
Chesapeake acquisition write-off of $651,000, Company operations would have
generated income of approximately $30,000 for 1996. Interest income increased
$301,000 as a result of the Company's investment of unused proceeds of the
Company's November 1995 initial public offering during the year. Interest
expense declined to approximately $5,000 in 1996 from $31,000 in the prior year
as a result of the conversion of $229,000 of convertible bonds outstanding at
the beginning of the year to common stock.
Net loss for the year decreased to $321,000 as compared to the prior year
net loss of $436,000, a 26.4% decrease. Without the impact of the uncompleted
Chesapeake acquisition costs write-off, the Company would have recognized net
income for 1996 of approximately $330,000. Net loss per share was $0.04 on both
a primary and fully-diluted basis as compared to net loss per share in 1995 of $
0.13 and $0.12 on a primary and fully-diluted basis, respectively. The average
number of shares used to compute per share amounts was significantly increased
as a result of the Company's initial public offering in November 1995.
On a pro forma basis, had the acquisitions of Strathmore, BUI and Danville
occurred at the beginning of fiscal 1995, revenues for 1996 would have been
$8,543,000 representing a 48.1% increase from $5,768,000 in 1995 attributable
primarily to the increase in Company-owned stores noted above and the growth in
revenues from Strathmore, BUI and Danville during the year. Net loss on a pro
forma basis for 1996 and 1995 would have been $548,000 and $676,000,
respectively, representing a 18.9% decrease between the years. This increase is
related to the write-off of costs related to the uncompleted Chesapeake
acquisition and other factors noted above, as well as inefficiencies in selling,
general and administrative expenses implicit in comparing on a pro forma basis
costs incurred by BUI, Strathmore and Danville prior to the acquisitions by the
Company. Pro forma net loss per share would have been approximately $0.07 and
$0.19 for the fiscal years ended November 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended November 30, 1996, cash provided by operating
activities was $69,000 as compared with $406,000 provided by operating
activities during 1995, or an 83.0% decrease. This decrease in a large part is
due to the costs related to the uncompleted Chesapeake acquisition written off
in the fourth quarter of $651,000 and other changes in operating assets and
liabilities. Without the impact of the write-off of these costs, cash flows from
operations would have been $720,000.
Cash used for investing activities during 1996 totaled $6,422,000 of which
$2,512,000 was used in the purchase of property, plant and equipment primarily
for new Company-owned store construction during the year. Business acquisitions
during the year required $2,474,000 in cash, including $991,000 related to BUI,
$880,000 related to Strathmore and $603,000 related to Danville. The purchase of
the Brewster's trademark and other rights required $171,000 in 1996. Cash used
for investing activities during 1995 totaled $458,000, which consisted primarily
of constructing and equipping the second Company-owned store totaling
approximately $157,000, the acquisition of the "Big Apple Deli" trademark, and
miscellaneous purchases of property, plant and equipment totaling approximately
$78,000 used in the corporate headquarters facilities.
Financing activities provided a total of $837,000 in 1996, due principally
to the exercise in January of the underwriter's over-allotment option from the
Company's initial public offering which provided the Company $882,000 after
expenses. This amount was reduced by the repayment of long-term obligations
during the year of $36,000.
On November 27, 1995, the Company completed a public offering of 2,550,000
shares of the Company's Common Stock for a public offering price of $2.67 per
share or an aggregate of $6,800,000. Costs associated with this offering totaled
approximately $1,056,000, which included an underwriting discount of 9% of the
offering amount, plus a nonaccountable expense allowance of 3%, and other
expenses. Effective with the closing of the public offering on November 30, 1995
and pursuant to an August 31, 1995 subscription agreement, the Company sold an
additional 403,536 shares of Common Stock to Aladdin at $1.80 per share. Costs
associated with this transaction totaled $97,500 payable to an investment
banking firm for assistance in obtaining the financing. The Company's cash needs
in fiscal 1996 were met, in part, with proceeds from these transactions.
To meet its goals in fiscal 1997 of continuing to add to Company-owned
stores and other strategic acquisitions, the Company requires additional
financing. Accordingly, the Company is currently seeking to place no more than
$3,000,000 in convertible preferred stock in a private placement to
institutional investors. Management believes that the proceeds of the private
placement, combined with cash flows from operations, should sufficiently fund
its planned expansion during 1997.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and Report of Independent Auditors is
included immediately following.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS
BAB HOLDINGS, INC.
YEARS ENDED NOVEMBER 30, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
BAB Holdings, Inc.
Consolidated Financial Statements
Years ended November 30, 1996 and 1995
CONTENTS
Report of Independent Auditors
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
The Shareholders and Board of Directors
BAB Holdings, Inc.
We have audited the accompanying consolidated balance sheets of BAB Holdings,
Inc. as of November 30, 1996 and 1995, and the related consolidated statements
of operations, shareholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BAB Holdings, Inc.
at November 30, 1996 and 1995, and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 7, 1997
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Balance Sheets
NOVEMBER 30
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of
$149,232 and $346,441, respectively $ 2,163,293 $ 7,679,009
Trade accounts receivable 471,303 81,198
National Marketing Fund contributions receivable 96,121 26,795
Inventories 103,314 16,542
Notes receivable 556,143 13,144
Amounts due from affiliate 36,347 18,026
Deferred franchise costs 43,576 25,238
Prepaid expenses and other current assets 216,176 35,553
----------- -----------
Total current assets 3,686,273 7,895,505
Property, plant, and equipment:
Leasehold improvements 1,064,648 101,937
Furniture and fixtures 435,277 101,480
Equipment 1,335,719 232,972
Construction in progress 997,383 --
----------- -----------
3,833,027 436,389
Less: Accumulated depreciation and amortization 299,315 87,957
----------- -----------
3,533,712 348,432
Patents, trademarks, and copyrights, net of accumulated
amortization of $21,752 and $1,446, respectively 545,177 172,575
Goodwill, net of accumulated amortization of $27,924 2,511,295 --
Other assets, net of accumulated amortization of $147,090 and $30,364,
respectively 583,346 63,627
Notes receivable 288,184 11,493
----------- -----------
$11,147,987 $ 8,491,632
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,056,548 $ 384,465
Accrued professional and other services 289,567 105,000
Accrued liabilities 228,947 107,536
Unexpended National Marketing Fund contributions 145,383 57,563
Current portion of long-term debt 6,375 7,927
Deferred franchise fee revenue 624,400 802,500
------------ ------------
Total current liabilities 2,351,220 1,464,991
Long-term debt, less current portion 1,758 236,294
Shareholders' equity:
Common stock, no par value; 20,000,000 shares
authorized, 7,413,069 shares
and 6,772,038 shares issued, respectively,
and 7,143,069 and 6,502,038
outstanding, respectively 9,218,522 7,903,183
Preferred stock, $0.01 par value; 4,000,000 shares authorized,
and no shares issued and outstanding -- --
Treasury stock at cost, 270,000 shares (17,500) (17,500)
Additional paid-in capital 1,010,167 --
Accumulated deficit (1,416,180) (1,095,336)
------------ ------------
Total shareholders' equity 8,795,009 6,790,347
------------ ------------
$ 11,147,987 $ 8,491,632
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BAB Holdings, Inc.
Consolidated Statements of Operations
YEAR ENDED NOVEMBER 30
1996 1995
----------- -----------
REVENUES
Net sales by Company-owned stores $ 3,484,319 $ 563,211
Franchise and area development fees 1,023,331 700,000
Royalty fees from franchised stores 1,402,839 767,064
Licensing fees and other income 413,109 2,728
----------- -----------
6,323,598 2,033,003
OPERATING COSTS AND EXPENSES
Food, beverage, and paper costs 1,221,826 191,415
Store payroll and other operating expenses 1,753,397 283,120
Costs of uncompleted business acquisition 650,922 --
Selling, general, and administrative expenses:
Payroll-related expenses 1,337,587 874,719
Advertising and promotion 365,387 118,036
Professional service fees 373,614 396,358
Franchise-related expenses 157,990 101,570
Depreciation and amortization 379,266 65,102
Other 704,228 423,261
----------- -----------
3,318,072 1,979,046
----------- -----------
6,944,217 2,453,581
----------- -----------
Loss from operations (620,619) (420,578)
Interest income 316,855 15,625
Interest expense (4,530) (30,807)
Other expense (12,550) --
----------- -----------
Net loss (320,844) (435,760)
Preferred stock dividends accumulated -- (4,000)
----------- -----------
Net loss attributable to common shareholders $ (320,844) $ (439,760)
=========== ===========
Primary earnings per share $ (0.04) $ (0.13)
=========== ===========
Fully diluted earnings per share $ (0.04) $ (0.12)
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Statements of Shareholders' Equity (Deficit)
COMMON STOCK PREFERRED STOCK TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ---- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of November 30, 1994 2,430,000 $ 49,570 56.0 $ 392,000 (270,000) $ (17,500)
Preferred stock conversion 813,000 379,400 (54.2) (379,400) -- --
Preferred stock redemption -- (6,002) (1.8) (12,600) -- --
Preferred stock cash dividends -- (5,944) -- -- -- --
Bond payable conversion 52,440 132,849 -- -- -- --
Issuance of common stock 3,476,598 7,353,310 -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ---- ----------- ----------- -----------
Balance as of November 30, 1995 6,772,038 7,903,183 -- -- (270,000) (17,500)
Bond payable conversion 75,060 190,989 -- -- -- --
Issuance of common stock 382,500 882,350 -- -- -- --
Cashless exercise of investor
warrant 133,471 -- -- -- -- --
Issuance of common stock in
acquisitions 50,000 242,000 -- -- -- --
Issuance of stock options in
acquisitions -- -- -- -- -- --
Net loss -- -- -- -- --
----------- ----------- ---- ----------- ----------- -----------
Balance as of November 30, 1996 7,413,069 $ 9,218,522 -- $ -- (270,000) $ (17,500)
=========== =========== ==== =========== =========== ===========
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ----------- -----------
Balance as of November 30, 1994 -- $ (659,576) $ (235,506)
Preferred stock conversion -- -- --
Preferred stock redemption -- -- (18,602)
Preferred stock cash dividends -- -- (5,944)
Bond payable conversion -- -- 132,849
Issuance of common stock -- -- 7,353,310
Net loss -- (435,760) (435,760)
----------- ----------- -----------
Balance as of November 30, 1995 -- (1,095,336) 6,790,347
Bond payable conversion -- -- 190,989
Issuance of common stock -- -- 882,350
Cashless exercise of investor
warrant -- -- --
Issuance of common stock in
acquisitions -- -- 242,000
Issuance of stock options in
acquisitions 1,010,167 -- 1,010,167
Net loss -- (320,844) (320,844)
----------- ----------- -----------
Balance as of November 30, 1996 $ 1,010,167 $(1,416,180) $ 8,795,009
=========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED NOVEMBER 30
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(320,844) $(435,760)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 379,266 65,102
Deferred preopening store cost (142,867) --
Other 11,045 16,236
Changes in operating assets and liabilities:
Trade accounts receivable (447,293) (52,274)
National Marketing Fund contributions receivable (69,326) (18,893)
Inventories (7,926) (10,354)
Deferred franchise costs (18,338) 9,710
Notes receivable (3,682) 17,766
Prepaid expenses and other assets (180,623) (19,340)
Amounts due from affiliate (18,321) (5,930)
Accounts payable 672,083 374,064
Accrued professional and other services 184,567 95,000
Accrued liabilities 121,411 38,966
Unexpended National Marketing Fund
franchisee contributions
87,820 26,400
Deferred franchise fee revenue (178,100) 305,500
--------- ---------
Net cash provided by operating activities 68,872 406,193
</TABLE>
<TABLE>
<CAPTION>
BAB Holdings, Inc.
Consolidated Statements of Cash Flows (continued)
YEAR ENDED NOVEMBER 30
1996 1995
----------- -----------
<S> <C> <C>
INVESTING ACTIVITIES
Purchase of Bagels Unlimited $ (990,874) $ --
Purchase of Stratmore (879,566) --
Purchase of Danville (602,988) --
Purchases of property, plant, and equipment (2,512,472) (254,299)
Purchase of trademarks (171,396) (169,291)
Purchases of other assets (143,765) --
Loan disbursements (1,254,196) --
Loan repayments 183,578 --
Other (50,171) (34,480)
----------- -----------
Net cash used for investing activities (6,421,850) (458,070)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,020,000 8,055,591
Payment of common stock issuance costs (137,650) (1,212,006)
Redemption of preferred stock -- (18,602)
Payment of preferred dividends -- (5,944)
Debt proceeds -- 520,000
Debt repayments (35,928) (16,930)
Other (9,160) (1,600)
----------- -----------
Net cash provided by financing activities 837,262 7,320,509
----------- -----------
Net increase (decrease) in cash and cash equivalents (5,515,716) 7,268,632
Cash and cash equivalents at beginning of year 7,679,009 410,377
----------- -----------
Cash and cash equivalents at end of year $ 2,163,293 $ 7,679,009
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BAB Holdings, Inc.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
BAB Holdings, Inc. (the Company) is an Illinois Corporation incorporated on
November 25, 1992. The Company has three wholly owned subsidiaries, BAB
Operations, Inc. (Operations), BAB Systems, Inc. (Systems), and Brewster's
Franchise Corporation (BFC). Systems was incorporated on December 2, 1992, and
was primarily established to franchise "Big Apple Bagels" specialty bagel retail
stores. Systems has a wholly owned subsidiary, Systems Investments, Inc.
(Investments), which was created to operate the first Company-owned Big Apple
Bagels store, which, until December 1995, also operated as the franchise
training facility. Investments owns a 50% interest in a joint venture which
operates a franchise satellite store. Operations was formed on August 30, 1995,
primarily to operate Company-owned stores, including one which currently serves
as the franchise training facility. BFC was established on February 15, 1996, to
franchise "Brewster's Coffee" concept coffee stores.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its direct and indirect wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. The joint venture is
accounted for using the equity method.
CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid investments,
primarily composed of money market mutual funds, certificates of deposit, and
government agency notes, which are convertible to a known amount of cash and
carry an insignificant risk of change in value.
INVENTORIES
Inventories are valued at the lower of cost, determined on a first in, first out
(FIFO) basis, or market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets. Estimated useful lives for the purposes of
depreciation are: leasehold improvements - ten years or term of lease if less;
machinery, equipment and fixtures - five to seven years.
INTANGIBLE ASSETS
The Company's intangible assets consist primarily of patents, trademarks, and
copyrights, organization costs, contract rights, noncompetition agreements, and
goodwill. Organization costs are primarily incorporation fees and legal fees
associated with initial Uniform Franchise Offering Circulars related to
operations and are being amortized over five years. Patents, trademarks, and
copyrights are being amortized over 17 years. Contract rights are related to
costs allocated to license agreements assumed by the Company in the acquisition
of Strathmore Bagels Franchise Corporation and are being amortized over 8.5
years, the remaining life of the contract. Noncompetition agreements are
amortized over the term of the agreements, which is six years. Goodwill recorded
as a result of acquisitions described in Note 11 are being amortized over 40
years. Amortization expense recorded in the accompanying consolidated statements
of operations for the years ended November 30, 1996 and 1995, was $164,956 and
$17,203, respectively.
STOCK OPTIONS
The Company uses the intrinsic method to account for stock options granted for
employees and directors. No compensation expense is recognized for stock options
because the exercise price of the option is at least equal to the market price
of the underlying stock on the grant date. Stock options granted as
consideration in purchase acquisitions during 1996 have been recorded as an
addition to additional paid-in capital in the accompanying balance sheet based
on the fair value of such options on the date of the acquisition.
DEFERRED FRANCHISE FEE REVENUES AND COSTS
The Company recognizes franchise fee revenue upon the opening of a franchise
store. Direct costs associated with the franchise sales are deferred until the
franchise fee revenue is recognized. These costs include site approval,
construction approval, commissions, blueprints, purchase of cash registers, and
training costs.
Area development agreement revenue is recognized on a pro rata basis as each
store covered by the agreement opens. At the termination of an agreement, any
remaining deferred franchise and area development agreement revenue is
recognized as such amounts are not refundable.
In addition to Company-operated and franchised stores, the Company acts as
licensor of "Big Apple Bagels" units owned and operated by Host Marriott
Services (Host Marriott). Included below as "licensed units" are these units
located primarily in airport and travel plazas served by Host Marriott. The
Company derives a licensing fee from certain sales at these units as well as a
sales commission from the sale of par-baked bagels to these units by a
third-party commercial bakery.
Stores which have been opened and unopened stores for which an agreement has
been executed and franchise or area development fees collected are as follows:
NOVEMBER 30
1996 1995
------------ ------------
Stores opened:
Company-owned 15 2
Franchisee-owned 99 59
Licensed 35 --
------------ ------------
149 61
Unopened stores:
Franchise agreement 26 32
Area development agreement 39 50
------------ ------------
65 82
------------ ------------
214 143
============ ============
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
$179,659 and $55,245 in 1996 and 1995, respectively. Included in advertising
expense was $41,928 and $30,912, in 1996 and 1995, respectively, related to the
Company's franchise operations.
NET LOSS ATTRIBUTABLE TO COMMON SHARE
All share information presented has been adjusted for the three-for-two stock
split effected in the form of a 50% dividend which occurred in April 1996. All
common stock and warrants issued within one year prior to the initial filing of
the public offering (see Note 8), have been treated as outstanding shares for
the periods prior to the initial public offering. Prior to the issuance of such
stock and warrants, the number of such shares included in the calculation of net
loss attributable to common share has been reduced by the number of shares that
could have been purchased at the public offering price using the proceeds from
the issuance. Subsequent to the issuance of such stock, only the actual number
of such shares issued has been included in the calculations. The primary
calculation of net loss attributable to common share is based on the net loss
attributable to common shareholders and the weighted-average number of common
shares outstanding during the period. The primary calculation of net loss
attributable to common share does not include the convertible bonds and the
convertible preferred stock because they are not common stock equivalents. The
fully diluted calculation of net loss attributable to common share assumes
conversion at the beginning of the period of any convertible security converted
during the period. Accordingly, the net loss attributable to common shareholders
was adjusted for preferred dividends accumulated and interest expense on
securities converted during the period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (the
Standard), which is effective for fiscal years beginning after December 15,
1995. The Company intends to implement the requirements of this Standard for the
fiscal year ended November 30, 1997, and has determined that, in accordance with
the Standard, it will not alter its current method of accounting for stock-based
compensation in the Consolidated Statement of Operations. The Company has not
yet determined the impact, on a pro forma basis, of implementing the disclosure
requirements of this standard.
3. RESTRICTED CASH
The Company is required by certain states to maintain franchise and area
development fees in escrow accounts until the related franchise stores commence
operations. At November 30, 1996 and November 30, 1995, these accounts totaled
$63,500 and $314,000, respectively.
The Company established the National Marketing Fund (Fund) during 1994.
Franchisees are required to contribute to the Fund based on their net sales and
in turn are reimbursed for a portion of media advertising placed in their local
markets up to a maximum equal to the amount they contributed. At November 30,
1996 and 1995, the Fund's cash balance was $85,732 and $32,441, respectively.
4. INCOME TAXES
There were no provisions for income taxes during the years ended November 30,
1996 and 1995, due to net operating losses incurred during those periods. The
reconciliation of the income tax benefit computed at the federal statutory rate
of 34% and the provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
1996 1995
------------------------------------
<S> <C> <C>
Income tax benefit computed at federal
statutory rate $(109,087) $(148,158)
State income tax benefit, net of federal tax
benefit (15,458) (20,995)
Permanent differences on debt financing
obtained (1,748) (31,701)
Other adjustments 1,046 (181)
Valuation allowance against net deferred tax
asset 125,247 201,035
------------------------------------
Provision for income taxes $ -- $ --
====================================
</TABLE>
There was no current income tax expense for the years ended November 30, 1996
and 1995, due to the Company incurring net operating losses for tax purposes
during each of those two years. No deferred taxes have been reflected in the
consolidated statements of operations because the Company has fully reserved the
tax benefit of net deductible temporary differences and operating loss
carryforwards due to the fact that the likelihood of realization of the tax
benefits cannot be established. The Company did not pay any income taxes during
the years ended November 30, 1996 and 1995.
Deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995
-----------------------------------
<S> <C> <C>
Franchise fee revenue $249,760 $313,400
Net operating loss carryforwards 350,464 117,211
Franchise costs 74,979 27,476
National Marketing Fund net contributions 19,664 12,976
Promotional expenses - 10,020
Depreciation (94,741) (22,347)
Start-up costs (21,092) -
Other 4,106 (843)
-----------------------------------
583,140 457,893
-----------------------------------
Valuation allowance (583,140) (457,893)
-----------------------------------
$ -- $ --
===================================
</TABLE>
At November 30, 1996, the Company has cumulative net operating loss
carryforwards expiring between 2008 and 2011 for U.S. federal income tax
purposes of approximately $876,160. The net operating loss carryforwards are
subject to limitation in any given year as a result of the Company's initial
public offering (see Note 8) and may be further limited if certain other events
occur.
5. LONG-TERM OBLIGATIONS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995
------------------------------------
<S> <C> <C>
Unsecured note payable to bank, principal payments due monthly
beginning April 1994, in accordance with a paydown schedule, at
an interest rate of 9.5% $2,245 $ 5,389
Secured note payable to bank, principal payments due monthly
beginning June 1994, in accordance with a paydown schedule, at an
interest rate of 8.75% 5,888 9,672
8% unsecured convertible bonds, due July 1, 2002 - 220,160
8% redeemed unsecured bonds, due July 1, 2000 - 9,000
------------------------------------
8,133 244,221
Less: Current portion 6,375 7,927
------------------------------------
Long-term debt, net of current portion $1,758 $236,294
====================================
</TABLE>
In fiscal 1995, the Company had outstanding $370,000 of 8% unsecured convertible
bonds due July 1, 2002. The bonds were convertible into shares of common stock
at the conversion ratio of one share for every $2.67 of principal outstanding.
In July 1995, the Company issued 52,440 shares of common stock to bondholders
exercising certain conversion rights. Among other terms of the issue, the
Company had the option of calling outstanding bonds at any time during the term,
subject to certain redemption notice requirements. On December 29, 1995, the
Company notified the remaining bondholders of its intent to redeem the
outstanding principal balance of the issue. Bondholders representing $200,160 of
principal elected to convert their interests to common stock pursuant to the
terms of bonds, resulting in the issuance of 75,060 shares of common stock. The
remaining outstanding principal was retired by the payment by the Company of
approximately $31,000 to bondholders in February 1996.
On August 15, 1995, the Company issued a convertible promissory note for
$500,000, due December 1, 1996, bearing interest at 11%, payable monthly. The
note was converted into 254,238 shares of common stock on August 31, 1995, in
connection with a stock subscription agreement (see Note 8).
The secured note payable to bank is collateralized by a delivery van.
As of November 30, 1996, annual maturities on long-term debt are due as follows:
$6,375 in 1997 and $1,758 in 1998. Interest paid for the years ended November
30, 1996 and 1995, was $4,530 and $28,954, respectively.
6. LEASE COMMITMENTS
The Company rents its office and Company-owned store facilities under leases
which require it to pay real estate taxes, insurance, and general repairs and
maintenance on these leased facilities. Rent expense for the years ended
November 30, 1996 and 1995, was $230,480 and $53,115, respectively. At November
30, 1996, future minimum annual rental commitments under the leases are as
follows:
1997 $ 707,210
1998 803,525
1999 755,863
2000 648,207
2001 488,370
Thereafter 809,143
-------------------
$4,212,318
===================
7. NONCASH TRANSACTIONS
During 1995 the Company converted $379,400 of preferred stock to common stock
(see Note 8).
In connection with the stock subscription agreement entered into on August 31,
1995, the $500,000 August 15, 1995, promissory note was converted to common
stock with put option, and the Company accepted a $200,000 note receivable (see
Notes 5 and 8).
During 1996 and 1995 the Company converted $190,989 and $132,849 of bonds, net
of bond issue costs, to shares of common stock (see Note 5).
On May 1, 1996, the Company issued 50,000 shares of common stock and an option
to purchase 100,000 additional shares of common stock valued, in total, at
approximately $392,000 and canceled notes and other receivables totaling
approximately $145,000 as a portion of consideration of the purchase of several
bagel stores owned and operated by a franchisee (see Notes 8 and 11).
On May 22, 1996, the Company issued an option to purchase 625,000 shares of
common stock valued at $860,000 in connection with the purchase of various
contract rights related to licensed units owned and operated by Host Marriott
(see Notes 8 and 11).
On October 18, 1996, the Company canceled notes and other receivables totaling
approximately $165,000 in connection with the purchase of all contract rights
and other assets of BrewCorp (formerly known as Brewster's Coffee Company, Inc.)
in foreclosure proceedings.
8. SHAREHOLDERS' EQUITY (DEFICIT)
On March 28, 1996, the Board of Directors declared a three-for-two stock split
effected in the form of a 50% dividend payable to shareholders of record on
April 12, 1996 and distributed on April 26, 1996. The terms of all outstanding
options and warrants to purchase shares of common stock were adjusted
accordingly. All share information has been adjusted to reflect the stock split.
During fiscal year 1995, the Company notified preferred shareholders of its
intention to redeem the outstanding shares of preferred stock. Subject to the
shareholder's conversion right, the Company had the right to redeem shares of
preferred stock for cash at a price equal to the original amount invested by the
shareholder, plus an annualized noncompounded return of 25% and all accrued but
unpaid dividends due. Preferred shareholders had the right to convert their
shares to shares of the Company's common stock at any time. During fiscal 1995,
54.2 preferred shares were converted to 813,000 shares of common stock, and the
remaining 1.8 shares were redeemed for cash. The Company declared and paid a 5%
dividend on the preferred stock for the period from November 2, 1994, through
the date of conversion or redemption of each preferred share, totaling $5,944.
On July 12, 1995, the Articles of Incorporation were amended to authorize
4,000,000 shares of preferred stock, $.01 par value. No shares of preferred
stock were outstanding at November 30, 1996 or 1995.
In July 1995, employees of the Company subscribed for 14,587 shares of common
stock at a price of $2.67 per share. The Company contributed $.67 per share
which was recorded as compensation expense. These shares were paid in full and
issued on September 30, 1995.
On August 31, 1995, the Company entered into a stock subscription agreement with
an "Investor" and sold 508,475 shares of common stock for $1,000,000, which was
paid, in part, by conversion of the $500,000 August 15, 1995 promissory note
(see Note 5). The net proceeds to the Company were $941,380.
On September 20, 1995, the Articles of Incorporation of the Company were amended
to increase the authorized common shares from 5,000,000 to 20,000,000 shares.
On November 27, 1995, the Company completed a public offering of 2,500,000
shares of common stock for a public offering price of $2.67 per share or an
aggregate of $6,800,000. Costs associated with this offering totaled $1,055,886,
which included an underwriting discount of 9% of the offering amount plus a
nonaccountable expense allowance of 3% along with other expenses. The Company
also sold to the underwriter, for nominal consideration, warrants to purchase
255,000 shares of the Company's common stock. The warrants are exercisable
between the first and fifth anniversary of the effective date of the initial
public offering at $3.20 per share.
On November 30, 1995, effective with the closing of the offering and pursuant to
the stock subscription agreement mentioned above, the Company sold an additional
403,536 shares of common stock to the Investor at $1.80 per share. Costs
associated with this transaction totaled $97,500 payable to an investment
banking firm for assistance in obtaining financing. The net proceeds to the
Company were $628,866. In addition, the Investor was granted a warrant to
purchase up to 144,041 shares of common stock exercisable from the date of
issuance through September 1, 1996, at a price of $.67 per share. On June 25,
1996, 133,471 shares of common stock were issued to the Investor in connection
with a cashless exercise of the warrant. In connection with this exercise, the
Investor forfeited the option to purchase the remaining 10,570 shares covered by
the warrant.
On January 2, 1996, the Company sold an additional 382,500 shares of Common
Stock at the public offering price of approximately $2.67 per share upon
exercise in full of the underwriter's over-allotment option, for an aggregate of
$1,020,000. Costs associated with the exercise of the over-allotment option
totaled approximately $138,000 which included an underwriting discount of 9% of
the offering amount, plus a nonaccountable expense allowance of 3%, and other
expenses. The net proceeds to the Company were approximately $882,000.
On May 1, 1996, in connection with the acquisition of Bagels Unlimited, Inc.,
the Company issued 50,000 shares of common stock and an option to purchase an
additional 100,000 shares of common stock. The option is exercisable for 5 years
commencing on May 1, 1996, at a $4.00 per share price. The stock and option were
valued at approximately $242,000 and $150,000, respectively.
On May 22, 1996, in connection with the acquisition of Strathmore Bagels
Franchise Corp., the Company issued an option to purchase 625,000 shares of
Holdings' common stock, no par value, at an exercise price of $6.17 per share.
The option is exercisable for 312,500 shares commencing on May 21, 1997, and for
the remaining 312,500 shares commencing on May 21, 1998. The exercise period for
the option ends on May 21, 1999. The option was valued at approximately
$860,000.
9. STOCK OPTION PLANS
On September 20, 1995, the Company adopted and received shareholder approval of
the 1995 Long-Term Incentive and Stock Option Plan (the Incentive Plan), which
permits the issuance of options, stock appreciation rights, and restricted stock
awards to employees and nonemployee officers, directors, and agents of the
Company. The Incentive Plan reserves 570,000 shares of common stock for grant
and provides that the term of each award be determined by the Board or a
committee of the Board. Under the terms of the Incentive Plan, options granted
may be either nonqualified or incentive stock options. Incentive stock options
must be exercisable at not less than the fair market value of a share on the
date of grant (110% of fair market value if the optionee is a 10% or greater
shareholder) and may be granted only to employees. The Incentive Plan will
terminate on September 19, 2005, unless terminated sooner by action of the
Board.
On September 20, 1995, incentive stock options were granted for an aggregate of
27,000 shares to 18 of the Company's employees, which are exercisable at $2.67
per share. Of the options issued to each employee in 1995, 750 options are
exercisable on December 1, 1996, and the remaining 750 options are exercisable
on December 1, 1997. During 1996, as a result of employees terminating their
employment with the Company, options to purchase 9,000 shares granted to six
employees were canceled. Additionally, on February 27, 1996, stock options to
purchase a total of 6,000 shares were granted to two employees, exercisable one
year from the date of grant, at an exercise price of $4.17. On April 23, 1996,
stock options to purchase a total of 262,500 shares were granted to five
employees, exercisable one year from the date of grant, 147,000 at an exercise
price of $6.37, and 115,000 to a 10% shareholder exercisable at $7.01. Options
are exercisable for a period of ten years from the respective exercise date.
Options issued terminate immediately following an optionee's termination of
employment or, in some circumstances, one to three months after termination or
up to 12 months in the case of the death of the employee.
Additionally, on September 20, 1995, the Company adopted and received
shareholder approval of the 1995 Outside Directors Stock Option Plan (the
Directors Plan), which permits the issuance of nonqualified options to
nonemployee members of the Board. The Directors Plan reserves 30,000 shares of
common stock for grant. The Directors Plan provides for a grant of options to
purchase 3,000 shares upon initial election to the Board and for annual grants
thereafter, upon reelection, of options to purchase 1,500 shares.
Options granted are immediately exercisable for a period of 10 years from the
date of grant at an exercise price per share equal to the fair market value of a
share on the date of grant. Upon termination of the directorship, the options
remain exercisable for periods of varying lengths based on the nature of the
option and the reason for termination. The Directors Plan will terminate on
September 19, 2005, unless terminated sooner by action of the Board.
On September 20, 1995, 3,000 options were granted to one nonemployee director
pursuant to his election to the Board which are exercisable at $2.67 per share.
On April 2, 1996, options to purchase 3,000 shares were issued to a director
upon her election to the Board, and options to purchase 3,000 shares were issued
to continuing nonemployee directors all with an exercise price of $4.83.
10. COSTS OF UNCOMPLETED ACQUISITION
On September 4, 1996 the Company signed an agreement to acquire certain assets
and assume certain liabilities of the two companies which represent the
operations of The Chesapeake Bagel Bakery (Chesapeake), a franchisor and
operator of Chesapeake Bagel Bakery concept specialty bagel stores. The
agreement was subject to certain closing conditions including the Company
obtaining funding for the acquisition by December 31, 1996. At that date, the
Company was unable to complete a public offering of its common stock necessary
to close the transaction on terms agreeable to management. The Company's costs
incurred in acquisition-related and equity offering-related activities have been
expensed in the accompanying consolidated statement of operations under the
caption "costs of uncompleted business acquisition."
11. BUSINESS COMBINATIONS
During the year the Company completed several acquisitions which were all
accounted for using the purchase method of accounting. On May 1, 1996, the
Company acquired certain assets of Bagels Unlimited, Inc. (BUI), a franchisee of
the Company which operated five Big Apple Bagels stores in southeastern
Wisconsin, for a purchase price, including acquisition costs, of approximately
$1,428,000. Additionally, the Company paid $100,000 to the former owners of BUI
in exchange for noncompetition agreements. The acquired stores are currently
operated as Company-owned Big Apple Bagels units.
On May 21, 1996, the Company acquired certain assets and contract rights of
Strathmore Bagels Franchise Corporation (Strathmore) for a purchase price
including acquisition costs of approximately $1,740,000, plus additional
consideration based on future openings of units operated by Host Marriott
Services Corporation (Host Marriott). In this acquisition, the Company acquired
rights to a license agreement with Host Marriott which operated 34 units,
contracts for each facility, and certain machinery and equipment. Additionally,
as part of the acquisition, the Company entered into noncompetition agreements
with the two former principals of Strathmore.
On October 7, 1996, the Company acquired certain assets of Danville Bagels, Inc.
(Danville), a franchisee of the Company operating two Big Apple Bagels stores in
northern California, for a purchase price of approximately $603,000.
Additionally, as part of the acquisition, the Company entered into
noncompetition agreements with the two former principals of Danville. The
acquired stores are currently operated as Company-owned Big Apple Bagels units.
The financial results of these acquisitions have been included in the
accompanying consolidated statement of operations from the date of acquisition
to the end of fiscal 1996. On a pro forma basis, had the above acquisitions
occurred at December 1, 1994, revenues for the fiscal years ended November 30,
1996 and 1995, would have been $8,543,000 and $5,768,000, respectively. Net loss
for fiscal 1996 and 1995 would have been $548,000 and $676,000, respectively, or
a net loss per share of $0.07 and $0.19, respectively.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company evaluates its various financial instruments based on current market
interest, rates relative to stated interest rates, length to maturity, and the
existence of a readily determinable market price. Based on the Company's
analysis, the fair value of financial instruments recorded on the consolidated
balance sheet at November 30, 1996, approximate their carrying value.
13. SUBSEQUENT EVENT
In January 1997, the Company completed the acquisitions of Just Bagels, Inc.
(JBI), and an affiliate, franchisees of the Company operating a total of four
stores in southern California. The total purchase price paid was $770,000
including $120,000 related to a noncompetition agreement with the former owners
of JBI and was paid in part through the forgiveness of notes receivable from JBI
of approximately $455,000.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Incorporated by reference to the Company's definitive proxy materials to be
filed with the Commission on or about March 15, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference to the Company's definitive proxy materials to be
filed with the Commission on or about March 15, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Company's definitive proxy materials to be
filed with the Commission on or about March 15, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Company's definitive proxy materials to be
filed with the Commission on or about March 15, 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
The following reports on Form 8-K were filed by the Company during the
last quarter of the fiscal year ended November 30, 1996:
Form 8-K/A filed November 19, 1996 as a Second Amendment to Form 8-K
filed June 5, 1996, concerning the acquisition on May 21, 1996, by the
Company of substantially all of certain assets of Strathmore Bagels
Franchise Corporation.
Form 8-K/A filed November 19, 1996 as a Second Amendment to Form 8-K
filed on May 15, 1996, concerning the acquisition on May 1, 1996, by
BAB Operations, Inc., a wholly-owned subsidiary of the Company, of
substantially all of the assets of Bagels Unlimited, Inc.
EXHIBITS
The following exhibits are filed herewith.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------------------------------------------------
[i] 2.1 Asset Purchase Agreement dated February 2, 1996 between the
Company, and Brewster's Coffee Company, Inc. and Peter D.
Grumhaus
[ii] 2.2a Asset Purchase Agreement by and among BAB Systems, Inc., Bagels
Unlimited, Inc. ("BUI"), and Donald Nelson and Mary Ann Varichak
dated May 1, 1996
[ii] 2.2b Non-Competition Agreement by and among the Company and Donald
Nelson and Mary Ann Varichak dated May 1, 1996
[ii] 2.2c Stock Option Agreement between the Company and BUI dated May 1,
1996
[ii] 2.2d Registration Rights Agreement between the Company and BUI dated
May 1, 1996
[iii] 2.3a Asset Purchase Agreement by and between the Company and
Strathmore Bagels Franchise Corp. ("Strathmore") dated May 21,
1996
[iii] 2.3b Stock Option Agreement dated May 21, 1996 between the Company
and Strathmore
[iii] 2.3c Registration Rights Agreement dated May 21, 1996 between the
Company and Strathmore
[iii] 2.3d Non-Competition Agreement dated May 21, 1996 among the Company,
and Strathmore, Jack Freedman and Glen Steuerman
[iii] 2.3e Memorandum of Understanding Regarding Form of License Agreement
effective November 30, 1995, between Strathmore and Host
International, Inc.
[iii] 2.3f Consent to Assignment between Strathmore and Host International,
Inc., dated March 13, 1996, as amended May 21, 1996
[iv] 3.1 Amended Articles of Incorporation of the Company
[iv] 3.2 Bylaws of the Company, as amended
[iv] 4.1 Form of Stock Certificate evidencing Common Stock, no par value
[iv] 4.2 Forms of Lock-up Agreement executed by certain shareholders
[iv] 4.3 Form of 8% Convertible Bond due July 1, 2002
[iv] 10.1 Form of Franchise Agreement
[iv] 10.2 Form of Franchise Agreement--Satellite
[iv] 10.3 Form of Franchise Agreement--Wholesale
[iv] 10.4 Form of Area Development Agreement
[iv] 10.5 Confidentiality and Non-Competition Agreement with Franchisees
[iv] 10.6 Form of Confidentiality Agreement with Employees
[iv] 10.7 Licensing Agreement dated November 20, 1992 between the Company
and Big Apple Bagels, Inc.
[iv] 10.8 Assignment of Royalty Mark & Trademark to the Company by Big
Apple Bagels, Inc. dated November 20, 1992
[iv] 10.9 Agreement dated September 14, 1995 among the Company, Big Apple
Bagels, Inc. and Paul C. Stolzer
[i] 10.10 Consulting agreement dated February 16, 1996 between Paul C.
Stolzer and BAB Holdings, Inc.
[iv] 10.11 Leases dated November 2, 1994 and February 14, 1995 for
principal executive office
[iv] 10.12 1995 Long-Term Incentive and Stock Option Plan
[iv] 10.13 1995 Outside Directors Stock Option Plan
[iv] 10.14 Settlement Agreement with Timothy Williams d/b/a Big Apple Deli
and Stipulated Dismissal with Prejudice
[v] 10.15 Program Agreement dated February 10, 1997 between BAB Systems,
Inc., a wholly-owned subsidiary of the Company, and Franchise
Mortgage Acceptance Company LLC
[v] 11.1 Calculation of earnings per share
[v] 21.1 List of Subsidiaries of the Company
- ----------------------------
[i] Incorporated by reference to the Company's Report on Form 10-KSB
for the fiscal year ended November 30, 1995
[ii] Incorporated by reference to the Company's Report on Form 8-K
dated May 1, 1996
[iii] Incorporated by reference to the Company's Report on Form 8-K
dated May 21, 1996
[iv] Incorporated by reference to the Company's Registration
Statement on Form SB-2, effective November 27, 1995 (Commission
File No. 33-98060C)
[v] Filed herewith.
INDEX TO EXHIBITS
INDEX
NUMBER DESCRIPTION PAGE #
10.15 Program Agreement dated February 10, 1997 between the BAB
Systems, Inc., a wholly-owned subsidiary of the Company, and
Franchise Mortgage Acceptance Company LLC
11.1 Calculation of Earnings Per Share
21.1 List of Subsidiaries of the Company
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report on Form 10-KSB to be signed on its behalf
by the undersigned, thereunto duly authorized.
BAB HOLDINGS, INC.
Dated: February 28, 1997 By /s/ Michael W. Evans
Michael W. Evans, Chief Executive Officer
and President (Principal Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report Form 10-KSB has been signed below by the following persons on behalf
of the company and in the capacities and on the dates indicated.
/s/ Michael W. Evans February 28, 1997
Michael W. Evans, Chief Executive Officer,
President and Director (Principal Executive
Officer)
/s/ Michael K. Murtaugh February 28, 1997
Michael K. Murtaugh, Director and Vice
President/General Counsel
/s/ Theodore P. Noncek February 28, 1997
Theodore P. Noncek, Chief Financial Officer, Secretary
and Treasurer (Principal Accounting and Financial Officer)
/s/ Paul C. Stolzer February 28, 1997
Paul C. Stolzer, Director
/s/ David L. Epstein February 28, 1997
David L. Epstein, Director
/s/ Cynthia A. Vahlkamp February 28, 1997
Cynthia A. Vahlkamp,
Director
PROGRAM AGREEMENT
PROGRAM AGREEMENT, dated this 10th day of February, 1997, by and
between FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, a California limited
liability company, having an office at Five Greenwich Office Park, Greenwich,
Connecticut 06831 ("FMAC"); and BAB Systems, INC., an Illinois corporation with
its principal place of business at 8501 W. Higgins Road, Suite 320, Chicago,
Illinois 60631 ("BAB");
W I T N E S S E T H :
WHEREAS, BAB is engaged in the business of franchising Big Apple Bagel
Stores ("Stores") to franchisees ("Franchisees") throughout the continental
United States of America ("Territory"); and
WHEREAS, FMAC is engaged in the business of financing the use and
acquisition of personal property to franchisees in the Territory.
WHEREAS, FMAC and BAB desire to create a program (the "Program") to
facilitate the development of additional Stores for existing BAB Franchisees;
and
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, FMAC and BAB intending to be legally bound, hereby agree as
follows:
1. The Program.
FMAC shall develop one or more proprietary finance programs for BAB to
facilitate the development of Stores for qualified existing BAB Franchisees. The
terms of the initial Program are set forth on Schedule 1 hereto. BAB shall
promote the Program to its Franchisees at sales meetings and by promotional
materials and agree to offer only the FMAC Program to Franchisees seeking to
finance an additional Store or Stores. Nothing contained herein is intended to
restrict a Franchisees right to obtain any other financing or for BAB to furnish
financing for its franchisees.
2. Loan Availability; Use of Proceeds; Documents.
Pursuant to the Program FMAC shall make available to qualified
Franchisees loans ("Loans")and/or lease financing ("Leases")(each a "Program
Financing") for a term, at rates and other terms set forth on Schedule 1 hereto.
The proceeds of the Program Financing will be used to finance the cost of
equipment ("Equipment") for improvements ("Improvements") to the Franchisee's
additional Store(s) as provided in Schedule 1. All Loans and Leases, including
advances thereon if any, made to Franchisees, will be subject to the Required
Payments and Net Loss provisions of Section 5 hereof. The documents related to
or used in connection with each Program Financing, including but not limited to
the note, security agreement, mortgage, if any, equipment lease or other
documents are hereinafter referred to collectively as the "Documents".
3. Approval Process.
(a) FMAC will require the following with respect to applications for
each Program Financing:
(i) a fully completed Franchise Credit Application in the form
of Exhibit A hereto,
(ii) the Location of the Store(s) for which the Program
Financing is to be used ("Premises"),
(iii) the cost of the Equipment ("Equipment Cost") and/or
Improvements ("Improvements Cost") and if advances are required (each an
"Advance") the amount and timing thereof,
(iv) the form of financing i.e. true lease, finance lease or
loan,
(v) the term of the financing,
(vi) the Franchisee's financial statements and tax returns for
the two (2) fiscal years preceding the Franchise Credit Application,
(vii) interim financial statements with comparable prior year
data if the full year statement is more than 90 days old,
(viii) personal financial statements and latest tax returns
for each of the principals of the Franchisee,
(ix) the location of Franchisee's existing Store(s) and
(x) such additional information as FMAC shall request (the
foregoing items shall hereinafter be referred to as the "Application Package").
(b) FMAC shall review the creditworthiness of each Franchisee and may
approve or reject any Franchisee or proposed Program Financing in its sole and
absolute discretion. Notwithstanding the FMAC approval no Program Financing
shall be made without the written approval of BAB. FMAC will use its best
efforts to evaluate each application for Program Financing within five (5)
business days after receipt of the Franchisee's completed Application Package at
FMAC's office in Greenwich, Connecticut. The approved amount of a Program
Financing is hereinafter referred to as the "Maximum Financing".
(c) FMAC will, with respect to a proposed Program Financing, advise BAB
of the name of the Franchisee, the Equipment Cost and Improvement Cost, the term
and amount of the requested financing and such additional information as BAB
reasonably requests. BAB will advise FMAC, in writing within five (5) business
days following its receipt of such information, of its approval or rejection of
such proposed Program Financing in the form of Exhibit B hereto.
(d) Upon its approval of the proposed Program Financing and its receipt
of BAB's written approval FMAC will issue an approval letter to the Franchisee
(the "FMAC Approval") which will contain an approval number. Each FMAC Approval
will be effective for a period of one hundred twenty (120) days from the date of
the FMAC Approval, after which period such FMAC Approval shall be deemed
withdrawn.
4. Program Financing Processing.
FMAC will fund an approved Program Financing upon receipt by FMAC of
(a) a fully completed Request for Advance, if applicable, in form of
Exhibit C hereto (the "Request for Advance"),
(b) with respect to a loan (i) an executed advance or permanent note in
the form of Exhibit D or E hereto (the "Advance Note" or "Permanent Note") and
(ii) executed security agreement in the form of Exhibit F hereto (the "Security
Agreement"),
(c) With respect to a Lease, (i) an executed Lease in the form of
Exhibit G hereto and (ii) if Advances are required, an executed progress payment
agreement in the form of Exhibit H hereto (the "Progress Payment Agreement"),
(d) such executed Uniform Commercial Code-1 financing statements, as
FMAC deems necessary or desirable to perfect its security or other interest in
the property which is the subject of the Security Agreement, each in form and
substance satisfactory to FMAC,
(e) any additional Documents or other information or materials required
by the terms of the FMAC Approval each in form and substance satisfactory to
FMAC,
(f) with respect to the portion of the Program Financing covering the
Equipment Cost (i) an invoice from the suppliers thereof, and (ii) a delivery
and acceptance certificate satisfactory to FMAC acknowledging the receipt,
satisfactory installation and acceptance of the Equipment by the Franchisee in
the form of Exhibit I hereof ("Delivery and Acceptance Certificate") and
(g) with respect to the portion of the Program Financing covering the
Improvements Cost,(i) an invoice or contract from the contractor providing the
Improvements setting forth, if required, the advance payments to be made to such
contractor; and (ii) with respect to the only or final payment to a contractor a
Completion Certificate with respect to the Improvements in the form of Exhibit J
hereto and (iii) if required by FMAC a lien release from such contractor.
(h) In addition to the provisions set forth above, if FMAC has made
Advances to or for the Franchisee for which an Advance Note was executed, on the
date the Advance becomes a Permanent Financing, (as defined below) Franchisee
shall, at the request of FMAC, execute and deliver to FMAC a replacement note
("Replacement Note") in the form of Exhibit K hereto.
(i) Payments under a Permanent Financing (as defined below) shall
commence (i) with respect to a Lease on the first day of the month (the "First
Lease Payment Date") following the earlier of the date the Equipment Cost is
funded or the date the Franchisee accepts the Equipment (the "Commencement
Date") provided interim rent shall be paid by the Franchisee for the period
between the Commencement Date and the First Lease Payment Date as provided in
the Lease, or (ii) with respect to a Loan on the first day of the second month
(the "First Loan Payment Date") following the date that the Loan becomes a
Permanent Financing (the "Loan Commencement Date"). If the Program Financing
involves a Lease and Advances are made, interim rent will be payable as provided
in the Progress Payment Agreement. If the Program Financing involves a Loan and
Advances are made, interest will be payable as provided in the Advance Note;
(j) The term "Permanent Financing" means a Loan or Lease with respect
to which (i) the Advances made to or for the Franchisee equal the Maximum
Financing, or (ii) the Advances made to or for the Franchisee outstanding on the
Outside Date for Advances set forth in the FMAC Approval if such Advances are
less than the Maximum Financing.
5. BAB Required Payments; Net Loss.
(a) Subject to the Maximum Loss limitation set forth herein, BAB agrees
to bear any Net Loss (hereinafter defined) which FMAC may suffer as a result of
a payment or other default by a Franchisee under a Program Financing. If a
Franchisee under a Program Financing defaults and such default remains uncured
for thirty (30) days (a "Defaulted Program Financing"), BAB shall, within ten
(10) days of FMAC's written demand, pay to FMAC the monthly Lease or Loan
payment due FMAC (or part thereof if a partial payment has been made) on such
Defaulted Program Financing (but excluding late charges, default interest and
similar charges) until the earlier of (v) eighteen (18) months from the date of
default (w) the date the Franchisee cures the default or has made other
arrangements for payment satisfactory to FMAC (x) the assumption of the Program
Financing by a replacement Franchisee acceptable to FMAC (y) the assumption of
the Program Financing by BAB (z) the date BAB advises FMAC that a location is
not viable and it desires to pay FMAC its Net Loss. FMAC shall advise BAB of any
Franchisee that is past due in payment for twenty (20) days.
If none of the foregoing (w), (x) or (y) occurs then at the earlier of
the expiration of such eighteen (18) month period or the date BAB so advises
FMAC, BAB shall pay FMAC its Net Loss for the Defaulted Program Financing;
provided in no event shall BAB's obligation to pay FMAC its Net Loss resulting
from Defaulted Program Financings funded during a Pool Year (as hereinafter
defined) exceed an amount equal to ten (10%) percent of the aggregate Program
Financings funded by FMAC in such Pool Year (the "Maximum Loss"). Required
Payments made by BAB will be charged against BAB's Maximum Loss and will reduce
BAB's obligation to pay Net Losses. FMAC may, in its discretion, defer demand
for payment of the Required Payment or Net Loss and no such delay shall
constitute a waiver of its right to payment. Notwithstanding the cure,
satisfactory payment arrangement or assumption of such Defaulted Program
Financing by a replacement Franchisee or BAB, BAB shall remain responsible and
in the event of a future default under such cured, replaced or assumed Program
Financing.
(b) FMAC shall use its customary efforts to collect payments on
Defaulted Program Financings or the accelerated balance due thereunder to the
same degree employed by FMAC in collecting its other leases or loans, including
where determined by FMAC to be appropriate, to institute legal proceedings
against the Franchisee or any collateral.
Upon the payment by BAB to FMAC of FMAC's Net Loss, FMAC shall, if
requested by BAB, assign its interest in the Documents relating to such
Defaulted Program Financing to BAB. If BAB elects to have a Defaulted Program
Financing assigned to it and prior thereto, FMAC has commenced an action against
the Franchisee, so long as no claims have been asserted against FMAC in such
action, BAB shall amend the pleadings to substitute BAB for FMAC and continue
the action with counsel of its choosing provided in such event, BAB shall pay
FMAC for all fees or expenses incurred by FMAC prior to such Assignment with
respect to such Defaulted Program Financing. If a claim has been made against
FMAC in such action or is thereafter made and notwithstanding the change of
counsel, FMAC may continue to designate counsel to represent its interest in
such action at FMAC's expense.
(c) "Net Collection" means the amounts recovered by FMAC with respect
to a Defaulted Program Financing (including from the disposition of collateral)
less all of FMAC's expenses incurred in connection with the collection of such
amounts. Net Collections shall be reported to BAB monthly and paid to BAB
monthly to the extent BAB has paid the Required Payments or Net Loss for such
Defaulted Program Financing and BAB is not otherwise in default hereunder. Net
Collections paid to BAB shall increase, dollar for dollar, the amount of Net
Losses available for payment to FMAC for the related Pool Year.
(d) "Net Loss" means: (i) with respect to a Loan, the unpaid principal
balance thereof plus interest accrued to the date of payment and FMAC's legal
expenses, if any, incurred in connection with such Loan and (ii) with respect to
a Lease, the unpaid balance of payments due and to become due thereunder less a
rebate of unearned lease charges computed to the date of default under the
actuarial method using the implicit rate used to compute the Lease payments plus
interest from such date to the date of payment at such implicit interest rate
and FMAC's legal expense, if any, incurred in connection with such defaulted
Lease.
(e) "Pool Year" means for the first Pool Year the period commencing on
the date the first Program Financing is funded and ending on the last day of the
month twelve months thereafter; the second Pool Year shall commence on the first
day following the end of the first Pool Year and end twelve months thereafter,
provided, that, if the effective date of termination of this Agreement occurs
other than on the last day of a Pool Year, the Pool Year shall end on the
effective date of termination.
(f) Any legal expenses incurred by FMAC in collecting payments on a
Defaulted Program Finance to the extent not recovered from the Franchisee or Net
Collections shall be borne by BAB whether the Program Financing was assigned to
BAB or retained by FMAC and if requested shall be paid to FMAC quarterly upon
receipt of itemized invoices therefore.
(g) BAB agrees to cooperate with FMAC in connection with FMAC's
collection efforts including, without limitation,
(i) if BAB deems it appropriate in its sole judgment to assume
the operation of the Store(s) of the defaulting Franchisee and the obligations
to FMAC
(ii) to obtain a qualified replacement Franchisee acceptable
to FMAC (which acceptance will not be unreasonably withheld) to assume the
Defaulted Program Financing. Notwithstanding any assumed Program Financing BAB
shall not be relieved of its obligation to make Required Payments or Net Loss
payments if a subsequent default occurs
(iii) if the Equipment is retaken from a defaulting Franchisee
to assist in the remarketing of the Equipment to the next available Franchisee
acceptable to FMAC.
6. Program Priority.
FMAC will promote the Program as a Tier One Priority "National Account"
within its organization. FMAC shall designate a person at its principal office
in Greenwich, Connecticut to administer the Program for FMAC (the "FMAC Program
Administrator"). FMAC shall also designate a person at its principal office in
Greenwich, Connecticut to provide daily assistance to Franchisees in connection
with the application and documentation process (the "FMAC Program Coordinator").
A designated group of sales, credit and "Franchise Support" personnel will also
be available on an as needed basis to assist BAB in marketing the Program and in
evaluating the credit and financial capability of Franchisees. FMAC shall
provide BAB with the name and toll free telephone number of the FMAC Program
Administrator and FMAC Program Coordinator. The FMAC Program Administrator will
be familiar with the Program generally, and be available to respond to inquiries
concerning the overall operations, implementation and marketing of the Program.
The FMAC Program Coordinator will be available during regular business hours to
respond to inquiries regarding and assist in completing the processing and
documenting of any proposed transaction.
7. Reporting.
FMAC shall provide BAB:
(a) monthly, not later than the tenth (10th) day of each month, with a
written report containing the following information:
(i) an aging of all Program Financing listing, among other
things, the term and balance of the term thereof;
(ii) a list of all proposed transactions indicating those
awaiting further documentation;
(iii) a list of all proposed transactions which were rejected
during the prior month;
(iv) a list of all approved transactions awaiting
documentation ;
(v) a list of all Defaulted Program Financings and Required
Payments to be made by BAB;
(vi) a list of all Defaulted Program Financings requiring a
payment to FMAC of the Net Loss and the amount thereof;
(vii) a list of all Net Collections made on Defaulted Program
Financings and amounts due BAB;
(viii) such other reports as agreed to by FMAC and BAB.
8. Administrative Fee.
FMAC shall pay to BAB or as BAB directs, an administrative fee of one
(1%) percent of the funds advanced by FMAC hereunder on the date of the final
advances or permanent funding hereunder to compensate for its administrative and
other duties hereunder.
9. Independent Contractor Relationship.
Nothing contained in this Agreement shall be deemed to constitute any
officer, employee or other personnel of either party to be the agent of the
other. It is the intention of BAB and FMAC that the relationship between them
shall be that of an independent contractor. No officer, employee or other person
associated with a party shall represent by his or her conduct or otherwise that
he or she is an agent or employee of the other party or authorized to speak for
or on behalf of the other party unless such action has previously been
authorized in writing by the other party.
10. Damages Limitation.
In no event shall FMAC or BAB be liable to the other under this
Agreement or any Document, or otherwise, for any lost profits or for any
special, indirect, incidental, exemplary or consequential damages for any reason
whatsoever. Nothing contained herein is intended to limit any parties right to
recover damages from the other for breach of this Agreement to any extent
permitted by applicable law.
11. Term of Agreement; Termination.
Unless sooner terminated this Agreement shall remain in full force and
effect for a period ended on the last day of the month falling twenty four
months from the date of the funding of the first Program Financing. This
Agreement may be terminated by either party upon the occurrence of a material
breach by the other party, which material breach is not cured within twenty (20)
days after delivery of written notice thereof from the non-defaulting party or;
(ii) if the volume of applications is insignificant and uneconomical to continue
or (iii) by BAB if FMAC's approved rate is unreasonably low. Notwithstanding
such termination, this Agreement shall remain in force with respect to any
Program Financing or any application for Program Financing which thereafter
results in a Program Financing or the obligations of BAB hereunder to make
Required Payments, Net Loss payment or pay or perform its other obligations
hereunder and FMAC's collection and other obligation hereunder with respect of
any Program Financing entered into prior to or if an application is pending,
after termination.
12. Notices.
Any notice required under this Agreement shall be deemed
sufficient if sent by (a) the United States mail, certified mail, postage
prepaid, return receipt requested, addressed to the addresses set forth at the
beginning of this Agreement or to such other address as directed by the parties
during the term of this Agreement, or (b) receipted facsimile transmission. Any
such notice shall be deemed to have been given if sent by mail, on the third
business day after the day duly deposited in the mail, or in the case of
facsimile transmission, on the day sent. Att: President.
13. Assignment; Binding Effect.
Neither party may assign or transfer, or attempt to assign or transfer,
all or any part of this Agreement except in connection with the sale of all or a
substantial part of the assets of the party in which sale the assignee agrees to
assume all of the obligations of the assignor provided that notwithstanding any
such assignment and assumption the assigning party shall continue to be liable
as if such assignment had not occurred. Notwithstanding the foregoing, FMAC may
assign its rights under the Documents and grant a security interest therein or
in the Equipment and/or the Improvements in connection with any financing or
securitization of the Documents. This Agreement is binding upon and shall inure
to the benefit of the parties and their respective permitted successors and
assigns.
14. Entire Agreement.
This Agreement, including the Exhibits and Schedules hereto, constitute
the entire agreement of the parties with respect to the subject matter hereof.
Neither FMAC nor BAB shall be bound by, nor shall be deemed to have made any
representation, warranty or covenant, except as contained herein. Any amendment
or modification of this Agreement must be in writing and signed by both parties
hereto.
15. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Connecticut.
16. Confidentiality
During the existence of this Agreement, and for a period of one (1)
year thereafter, FMAC shall treat as confidential the names and financial
information of BAB's franchises whether or not FMAC enters into a Program
Financing with such franchisee.
17. No Third Party Beneficiaries
This Agreement is entered into solely for the benefit of FMAC and BAB
and their respective successors and permitted assigns and no other person, firm,
entity or corporation (including, without limitation, any Franchisee) shall have
any right, benefit or interest under or because of the existence of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
FRANCHISE MORTGAGE ACCEPTANCE
COMPANY LLC
By: /s/ John Rinaldi
--------------------------------------
John Rinaldi
Title: Sr. VP
-----------------------------------
BAB SYSTEMS, INC.
By: /s/ Theodore P. Noncek
--------------------------------------
Theodore P. Noncek
Title: Chief Financial Officer
-----------------------------------
Exhibit 11.1
BAB HOLDINGS, INC.
CALCULATION OF EARNINGS PER SHARE
YEARS ENDED NOVEMBER 30, 1996 AND 1995
1996 1995
--------------- ---------------
PRIMARY
Net Loss (320,844.00) (435,760.00)
Less pref. stock dividend -- (4,000.00)
Net loss applicable to --------------- ---------------
common shareholders (320,844.00) (439,760.00)
=============== ===============
Weighted average share outstanding 7,366,645 3,382,916
Net loss per common share $ (0.0436) $ (0.1300)
FULLY DILUTED
Net loss (320,844.00) (435,760.00)
Less pref. stock dividend -- (4,000.00)
Add back "as if" stock dividend -- 4,000.00
Bond interest exp. on "as if" conv 566.00 6,525.00
=============== ===============
Net loss applicable to
common shareholders (320,278.00) (429,235.00)
=============== ===============
Weighted average shares outstanding 7,420,538 3,560,257
Net loss per common share,
fully diluted $ (0.0432) $ (0.1206)
Exhibit 21.1
SUBSIDIARIES OF BAB HOLDINGS, INC.
BAB Systems, Inc., an Illinois corporation
BAB Operations, Inc., an Illinois corporation
Brewster's Franchise Corporation, an Illinois corporation
Systems Investments, Inc., an Illinois corporation, (a wholly-owned subsidiary
of BAB Systems, Inc., which is a subsidiary of BAB Holdings, Inc.)
Chesapeake Franchise Corporation, an Illinois corporation (an inactive, unfunded
subsidiary)
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BAB HOLDINGS, INC. FOR THE YEAR ENDED NOVEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
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0
0
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